Effects of Transparency on Customer-Supplier Contracting

Abstract

This paper examines the effects of disclosure on customer-supplier payment practices. Exploiting the introduction of the Payment Practices Disclosure Regulation (PPDR) in the United Kingdom, we find that large firms that are required to disclose their payment practices reduce accounts payable as a fraction of assets by 2.1% and that small, non-disclosing firms experience a reduction of 11.3% in accounts receivable scaled by revenue. Cross-sectional tests suggest that the threat of consumer pressure and barriers to entry are important drivers of the change in payment terms, with effects concentrated among firms that sell to final consumers and those with high barriers to entry. We also show that the effects occur over time, with large firms reducing the fraction of invoices not paid within the agreed terms by 1.5% every six months. Our findings indicate that disclosure regulation is an effective tool for changing payment practices.