Wisdom of Crowds along the Supply Chain

Using the Twitter setting, we examine whether social media data about trade debtors' prospects are informative for assessing their creditworthiness. We employ a regression discontinuity design to exploit the random, discrete variation in the debtors' consumer satisfaction scores around discontinuities created by exogenous, pre-determined rounding rules. We document an increase in supplier-awarded trade credit (by about 1.3 [0.4] percent of the cost of goods sold [assets]) in response to a rounding-induced 1-point surge in these scores, which have a 0-100 range. In the cross-section, we find that this effect holds mainly when: (i) trade debtors fall within the "inconclusive region" of a key traditional financial health metric; (ii) uncertainties about trade debtors' future earnings and future cash flows are high; (iii) there is no previous debtor-supplier relationship; and (iv) debtors have strong negotiation power. Overall, our evidence suggests that suppliers use alternative data to mitigate uncertainties about trade debtors' prospects.