The Many Rewards of Paying Bills Late
For individuals, not paying bills on time is a sign of financial distress. That's true for most businesses, too. For big businesses, though, things are different.
For one thing, they generally don't pay their bills on time. Only 10.8 percent of publicly traded corporations in the U.S. pay suppliers on time or early, according to new data from Dun & Bradstreet.
If almost everybody in your peer group is delinquent, there's unlikely to be much of a stigma attached to delinquency. Far from it, in fact:
After controlling for other effects, the study finds that firms that pay their suppliers consistently late are rewarded with higher stock returns while firms that pay their suppliers inconsistently early are punished with lower stock returns. We find this effect persistent across time, across size, across weighting schemes and across sectors.
That quote and the information in the above chart are from a remarkable new paper by Dun & Bradstreet's Paul K. Lieberman titled "Payment Power and the Cross Section of Stock Returns: Does it Pay to Pay Consistently Late?" You already know the answer. Which makes this an interesting, and in some ways disturbing, phenomenon.
Dun & Bradstreet tracks the payment behavior of millions of U.S. businesses. This information is traditionally used by bankers deciding whether to extend credit, as well as businesspeople deciding whom to do business with. In these contexts, paying late is a bad thing. But Lieberman, a quantitative-investing veteran who is now D&B's director of analytics innovation, thought equity investors might see it differently.
There's been a smattering of media coverage in recent years (some of it by me) about big companies that seem to be deliberately holding off on payments to suppliers. There's also been a smattering of academic research on whether and why this behavior pays off -- one 2015 study proposed that because suppliers possess "superior information about their customers’ prospects" and are willing to "extend trade credit to capture future profitable business," the fact that a corporation owes lots of money to suppliers is a sign that its growth prospects are good.
Lieberman doesn't dismiss this explanation but emphasizes the simpler one that big corporations delay payment because they can, and are able to take advantage of this "market power" relative to suppliers by:
Increasing their cash-flow and improving their cash-flow management.
Avoiding short-term financing to meet payables.
Investing the extra cash.
Increasing their bargaining power over suppliers on price and volume.
All of this appears to make them better investments than companies that can't or don't take advantage of their suppliers in this way. Lieberman's paper is aimed at professional investors -- a potential new customer base for D&B's data. If you're a professional investor, and you're interested, go read it! I'm not a professional investor, though, and what's most striking to me about his finding is that it shows big, publicly traded companies to be systematically and successfully using their market power to take advantage of their (usually smaller) suppliers.
Lieberman's paper doesn't discuss whether this behavior is on the rise, and he told me that in the aggregate payments data for the period he studied (2005 through 2016), the rise in late payments during the financial crisis and recession and the decline since then makes it hard to see any overall trend. But there are definitely some big, successful companies for which what the Bloomberg terminal calls "accounts payable turnover days" and much of the rest of the world calls "days payable outstanding" have risen a lot over the past two decades.
Much has been written lately about the decline in business dynamism in the U.S., the slowdown in new company formation, and the increasing concentration of many industries. Big companies have been getting bigger and more powerful, and the rest of the economy has only plodded along. As American University law professor Jonathan B. Baker wrote in March:
The U.S. economy has a “market power” problem, notwithstanding our strong and extensive antitrust institutions. The surprising conjunction of the exercise of market power with well-established antitrust norms, precedents, and enforcement institutions is the central paradox of U.S. competition policy today.
Paying suppliers late would seem to be another of those market power problems that's strengthening big businesses and making life harder for small ones -- and is hard to combat with existing "norms, precedents, and enforcement institutions." The Barack Obama administration launched a "SupplierPay" initiative in 2014 aimed at getting big companies to commit to not paying late, but it doesn't seem to have changed much. The European Union has gone further, with a 2011 directive instructing member nations to pass laws penalizing late payments, but a 2016 study found that many small and medium-size enterprises in Europe still complained of being squeezed by late-paying big customers. The rewards to being a deadbeat are apparently just too great for giant corporations to pass up.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
The measure they use is accounts payable divided by the sum of accounts payable and financial credit. The idea is that banks and bond investors know less than suppliers, so a company with more financial credit relative to accounts payable has worse growth prospects.
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