Trade Credit Management and Information Asymmetry in Small and Medium-Sized Businesses in an Emerging Market

Abstract

Purpose – This study explores trade credit conditions by way of their potential for reducing information asymmetry between buyers and sellers in an emerging market context. Theoretical framework – The theoretical line tested empirically in this article focuses on the information asymmetry between selling companies and their buying customers. Design/methodology/approach – Based on a survey among the CFOs of more than 300 SMEs that operate in Brazil we use linear and logit regressions to test our hypotheses. Findings – The results point to evidence of a considerable variation in policies and practices, and to the fact that part of the variation can be explained in terms of the characteristics of the firm. Support is also identified for a series of hypotheses based on arguments about ways of resolving information asymmetry between buyers and sellers, as well as price discrimination. Practical & social implications of research – Entrepreneurs can benefit from the results of this study to manage information asymmetry, as well as to properly establish credit terms. Originality/value – The credit period allows buyers to reduce uncertainties as to the quality of the product before they pay, and sellers can settle any uncertainties they might have about the buyer’s payment intentions. This phenomenon, however, is sensitive to institutional environment issues, and according to the empirical evidence little is known about small and medium-sized enterprises (SMEs) operating in emerging markets, which are characterized by their information uncertainty and asymmetry.