The role of information asymmetry in trade financing
The 2008 financial crisis revealed the importance of trade financing during economic downturns. Inter-firm trade financing account for approximately 60-70% of all financing contracts in domestic and international trade. In his doctoral thesis Parviz Alizada examines what factors affect trade financing and trade relationships mainly from the perspective of information asymmetry.
What are the most important results in your research?
First, I find that financially constrained firms with greater cash holdings are likely to receive significantly more trade credit. Second, hold-up, information asymmetry, and trade credit among counterparties affect the duration of trade relationships. Finally, I show that banks close to major trade hubs supply more trade financing.
What could the results lead to?
By maintaining more sustainable trade relationships we can achieve stronger trade ties among firms. Consequently, economics systems can be more resilient to financial crises. This can more easily be implemented in domestic scale or within organizations with free trade agreements.
What significance does the research have for research/and or society?
I show that higher information asymmetry is harmful to sustainable trade relationships. Moreover, I provide an alternative explanation to the question “why cash holdings are important for firms?”
What do you hope to achieve with your research?
I hope to extend our understanding of trade financing and trade relationships and provide clarifications for behaviors of market participants. I also aim that policymakers and practitioners, to some extent, consider the findings of my research in their work.
Parviz Alizada defends his thesis Essays in trade financing and trade relationships 12 th April 2019.