Does Trade Credit Absorb Adverse Shocks?

The aim of this paper is to examine whether trade credit contributes to absorbing adverse shocks to firms. If the relaxation of trade credit terms contributes to holding back the level of real activities, firms that postpone payment to suppliers would not reduce the amount of purchases when they encounter exogenous adverse shocks. We test this hypothesis by investigating the relation between the postponement of payment and the reduction in purchase amounts by using data of SMEs obtained from two corporate surveys after the Global Financial Crisis and the COVID-19 shocks. From our analysis, we do not find that firms that postponed the payment are less likely to reduce the amount of purchases, which indicates that trade credit does not contribute to absorbing adverse shocks.