Vendor financing is credit instrument offered by a supplier to increase the sale of its product. Vendor financing is prevailing among riskier firms, competing primarily with short-term bank debt, revolving line, in corporate debt market. This paper models the differential contractual features of vendor financing compared to bank revolving line. When there exists positive mark-up due to imperfectness of intermediate good market, an intermediate good supplier can increase the sales and profits by offering vendor financing to risky borrowing firms. Therefore, vendor financing tends to service riskier borrowing firms than bank revolving line does in corporate debt market. To deal with the issue of corporate liquidity management in lieu of selecting short-term financing source between bank revolving line and vendor financing, this paper provides both analytical model extended from screening model and empirical analysis utilizing a unique database, LPC’s DealScan, for bank financing contract. The empirical analyses using Compustat and LPC DealScan data support the theoretical prediction.
Key Words: Asymmetric Information, Corporate Debt Market, Bank Revolving Line, Vendor Financing, Selection of Financing Source
