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Payment Defaults and Interfirm Liquidity Provision

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  • Frederic Boissay
  • Reint Gropp

Abstract

Using a unique data set on French firms, we show that credit constrained firms that face liquidity shocks are more likely to default on their payments to suppliers. Credit constrained firms pass on a sizeable fraction of such shocks to their suppliers. This is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate credit constraints. We show that the chain of defaults stops when it reaches unconstrained firms. Liquidity appears to be allocated from firms with access to outside finance to credit constrained firms along supply chains. Copyright 2013, Oxford University Press.

Suggested Citation

  • Frederic Boissay & Reint Gropp, 2013. "Payment Defaults and Interfirm Liquidity Provision," Review of Finance, European Finance Association, vol. 17(6), pages 1853-1894.
    • Handle: RePEc:oup:revfin:v:17:y:2013:i:6:p:1853-1894
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    File URL: http://hdl.handle.net/10.1093/rof/rfs045
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