Impact of Resource Slack On Demand for Trade Credit: Evidence from Sticky Costs

I provide evidence that managers demand more trade credit when their firms’ costs become stickier. Because cost stickiness- a consequence of decision to retain slack- can be either value maximising or value destroying, it becomes a source of information asymmetry between the firm and its financiers. Managers deal with this increase in information asymmetry by reaching out to suppliers for financing, to benefit from suppliers’ information advantage in understanding cost stickiness. Further, I find that the positive relation between cost stickiness and managers’ demand for trade credit is driven by cost stickiness that is perceived to be abnormal, as this is where suppliers’ information advantage becomes more useful. Likewise, cross-sectional analyses reveal that the increase in demand for trade credit is lower when quality of public information set is adequate, or when firm’s monitors can limit managerial opportunism in investment in slack, consistent with the suppliers’ information advantage story