IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/2007753.html
   My bibliography  Save this paper

Trade credit defaults and liquidity provision by firms

Author

Listed:
  • Gropp, Reint
  • Boissay, Frédéric

Abstract

Using a unique data set on trade credit defaults among French firms, we investigate whether and how trade credit is used to relax financial constraints. We show that firms that face idiosyncratic liquidity shocks are more likely to default on trade credit, especially when the shocks are unexpected, firms have little liquidity, are likely to be credit constrained or are close to their debt capacity. We estimate that credit constrained firms pass more than one fourth of the liquidity shocks they face on to their suppliers down the trade credit chain. The evidence is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate the consequences of credit constraints. In addition, we show that the chain of defaults stops when it reaches firms that are large, liquid, and have access to financial markets. This suggests that liquidity is allocated from large firms with access to outside finance to small, credit constrained firms through trade credit chains. JEL Classification: G30, D92, G20

Suggested Citation

  • Gropp, Reint & Boissay, Frédéric, 2007. "Trade credit defaults and liquidity provision by firms," Working Paper Series 753, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007753
    Note: 56868
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp753.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    2. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    3. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    4. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 407-443.
    5. Lee, Yul W. & Stowe, John D., 1993. "Product Risk, Asymmetric Information, and Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 285-300, June.
    6. Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
    7. repec:bla:jfinan:v:43:y:1988:i:5:p:1127-41 is not listed on IDEAS
    8. Mariassunta Giannetti & Mike Burkart & Tore Ellingsen, 2011. "What You Sell Is What You Lend? Explaining Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1261-1298.
    9. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-937.
    10. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    11. Nobuhiro Kiyotaki & John Moore, 1997. "Credit Chains," Edinburgh School of Economics Discussion Paper Series 118, Edinburgh School of Economics, University of Edinburgh.
    12. Barbara Summers & Nicholas Wilson, 2003. "Trade credit and customer relationships," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 439-455.
    13. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
    14. Bardos, M. & Stili, D., 2006. "Risk contagion through defaults on trade bills," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 06, pages 49-71, Winter.
    15. Bardos, Mireille, 1998. "Detecting the risk of company failure at the Banque de France," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1405-1419, October.
    16. Stanley D. Longhofer & Joao A.C. Santos, 2003. "The Paradox of Priority," Financial Management, Financial Management Association, vol. 32(1), Spring.
    17. George W. Blazenko & Kirk Vandezande, 2003. "The product differentiation hypothesis for corporate trade credit," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 457-469.
    18. J. Stephen Ferris, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(2), pages 243-270.
    19. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-423, July.
    20. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088, March.
    21. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
    22. Nobuhiro Kiyotaki & John Moore, 2002. "Balance-Sheet Contagion," American Economic Review, American Economic Association, vol. 92(2), pages 46-50, May.
    23. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heikki Peura & S. Alex Yang & Guoming Lai, 2017. "Trade Credit in Competition: A Horizontal Benefit," Manufacturing & Service Operations Management, INFORMS, vol. 19(2), pages 263-289, May.
    2. Leora Klapper & Luc Laeven & Raghuram Rajan, 2012. "Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 838-867.
    3. Chod, Jiri & Lyandres, Evgeny & Yang, S. Alex, 2019. "Trade credit and supplier competition," Journal of Financial Economics, Elsevier, vol. 131(2), pages 484-505.
    4. Bougheas, Spiros & Mateut, Simona & Mizen, Paul, 2009. "Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 300-307, February.
    5. Mateut, Simona & Chevapatrakul, Thanaset, 2018. "Customer financing, bargaining power and trade credit uptake," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 147-162.
    6. Mariarosaria Agostino & Francesco Trivieri, 2014. "Does trade credit play a signalling role? Some evidence from SMEs microdata," Small Business Economics, Springer, vol. 42(1), pages 131-151, January.
    7. Galia Taseva, 2012. "Trade Credit Terms between the Firms in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 110-136.
    8. Cheung, Adrian (Waikong) & Pok, Wee Ching, 2019. "Corporate social responsibility and provision of trade credit," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(3).
    9. Simona Mateut & Paul Mizen & Ydriss Ziane, 2012. "No Going Back: How the Production Process Affects Access to Short-term Credit," Discussion Papers 12/14, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    10. El Ghoul, Sadok & Zheng, Xiaolan, 2016. "Trade credit provision and national culture," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 475-501.
    11. Costello, Anna M., 2019. "The value of collateral in trade finance," Journal of Financial Economics, Elsevier, vol. 134(1), pages 70-90.
    12. Hasan, Mostafa Monzur & Habib, Ahsan, 2019. "Social capital and trade credit," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 158-174.
    13. Abdulla, Yomna & Dang, Viet Anh & Khurshed, Arif, 2017. "Stock market listing and the use of trade credit: Evidence from public and private firms," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 391-410.
    14. Mateut, Simona & Mizen, Paul & Ziane, Ydriss, 2015. "Inventory composition and trade credit," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 434-446.
    15. Gofman, Michael & Wu, Youchang, 2022. "Trade credit and profitability in production networks," Journal of Financial Economics, Elsevier, vol. 143(1), pages 593-618.
    16. Jiri Chod, 2017. "Inventory, Risk Shifting, and Trade Credit," Management Science, INFORMS, vol. 63(10), pages 3207-3225, October.
    17. Ciżkowicz-Pękała Magda, 2017. "Trade credit: a benefit to get, a “must” to give? Motives behind trade credit use in Poland," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 13(4), pages 54-66, December.
    18. Afrifa, Godfred Adjapong & Gyapong, Ernest & Monem, Reza M., 2018. "Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 235-253.
    19. Simona Mateut & Paul Mizen & Ydriss Ziane, 2011. "No Going Back: The Interactions Between Processed Inventories and Trade Credit," Discussion Papers 11/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    20. Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2013. "Are trade creditors relationship lenders?," Japan and the World Economy, Elsevier, vol. 25, pages 24-38.

    More about this item

    Keywords

    credit chains.; credit constraints; inter-firm liquidity provision; trade credit;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:2007753. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.