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Suppliers as financial intermediaries: Trade credit for undervalued firms

Author

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  • Fontaine, Patrice
  • Zhao, Sujiao

Abstract

We examine the impact of undervaluation on a firm's use of trade credit. To address potential endogeneity bias, we construct our instrumental variable based on mutual fund outflow-driven price pressure, and our undervaluation measure allows us to distinguish misvaluation from fair valuation. We find that a firm's suppliers play an important role in providing temporary bridge financing when the firm is undervalued. The effect varies with the firm's information environment and with its dependence on external finance. In addition, based on a manually matched supplier-customer sample, we show that small customers in long-term relationships with their suppliers are more likely to obtain trade credit when facing stock market undervaluation, while small suppliers with a smaller customer pool extend more trade credit to their undervalued customers.

Suggested Citation

  • Fontaine, Patrice & Zhao, Sujiao, 2021. "Suppliers as financial intermediaries: Trade credit for undervalued firms," Journal of Banking & Finance, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:jbfina:v:124:y:2021:i:c:s0378426621000017
    DOI: 10.1016/j.jbankfin.2021.106043
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    Citations

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    Cited by:

    1. Zhu, Xiuli & Li, Xiaohui & Zhou, Kexin & Yu, Yuying, 2023. "The impact of annual reports transparency and comment letters on the cost of debt: Evidence for China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    2. Duan, Zhixin & Hu, Mingsheng, 2024. "Dig the treasure nearby: The impact of local supplier preference on trade credit financing," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 629-650.
    3. Gaurav Nagpal & Udayan Chanda & Himanshu Seth & Namita Ruparel, 2022. "Inventory Replenishment Policies for Two Successive Generations of Technology Products Under Permissible Delay in Payments," International Journal of Information Systems and Supply Chain Management (IJISSCM), IGI Global, vol. 15(1), pages 1-29, January.
    4. Tsuruta, Daisuke, 2023. "Bank loans, trade credit, and liquidity shortages of small businesses during the global financial crisis," International Review of Financial Analysis, Elsevier, vol. 90(C).
    5. Zhu, Ying & Huang, Ke, 2023. "Customers’ litigation risk and suppliers’ cash holding decision: From the perspective of risk contagion," Finance Research Letters, Elsevier, vol. 55(PB).

    More about this item

    Keywords

    Undervaluation; Trade credit; Information advantage; Implicit equity stake;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D2 - Microeconomics - - Production and Organizations
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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