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Suppliers as financial intermediaries: Trade credit for undervalued firms

Author

Listed:
  • Patrice Fontaine

    (EUROFIDAI - Institut Européen de données financières - ESSEC Business School - CNRS - Centre National de la Recherche Scientifique, PULV - Pôle Universitaire Léonard de Vinci)

  • Sujiao Zhao

    (Banco de Portugal - Banco de Portugal, UCP Porto - Catholic University of Portugal / Porto - Faculdade de Economia e Gestão & CEGE - Catholic University of Portugal / Porto - Faculdade de Economia e Gestão & CEGE)

Abstract

We examine the impact of undervaluation on a firm's use of trade credit. To address potential endogene- ity 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 under- valued. 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 cus- tomers in long-term relationships with their suppliers are more likely to obtain trade credit when fac- ing stock market undervaluation, while small suppliers with a smaller customer pool extend more trade credit to their undervalued customers.

Suggested Citation

  • Patrice Fontaine & Sujiao Zhao, 2021. "Suppliers as financial intermediaries: Trade credit for undervalued firms," Post-Print hal-03507372, HAL.
    • Handle: RePEc:hal:journl:hal-03507372
    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. 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).
    3. 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.
    4. 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.
    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).

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