Bargaining Power, Firm Value, and Trade Credit: Evidence From Violations of Japan's Subcontract Act

Some large firms benefit substantially from strong bargaining positions because they can request price discounts from small suppliers. Furthermore, the bargaining power of large customers affects their use of trade credit. We use a direct measure of bargaining power by focusing on violations of Japan's Subcontract Act . We show that the return on assets of firms with strong bargaining power is high. However, the return on assets decreased by 1.65% on average after bargaining power could not be exercised. In addition, trade payables increase after the announcement, suggesting a negative relationship between price discounts and trade credit.