Trade Credit and Industry Dynamics: Evidence from Trucking Firms

Abstract

Long payment terms are a strong impediment to the entry and survival of liquidity constrained firms. To test this idea and its implications, I consider the effect of a reform restricting the trade credit supply of French trucking firms. In a difference-in-differences setting, I find that trucking firms' corporate default probability drops by one-fourth following the restriction. The effect is persistent, concentrated among liquidity constrained firms, and not offset by a drop in profits. The restriction also triggers an increase in the entry of small trucking firms.JEL classification: G32, G33, G34, D23 * MIT Sloan School of Management. Email: jnbarrot@mit.edu. I am indebted to Antoinette Schoar and David Thesmar for their invaluable guidance and support. I am grateful to Michael Roberts (the editor) as well as two anonymous referees for their suggestions. I thank Francois Derrien, Laurent Fresard, Denis Gromb, Uli Hege, Augustin Landier, Clemens Otto, and Mitchell Petersen for their very helpful comments in the early stages of this project. I am deeply grateful to Claire Lelarge for her insights and assistance with the data. This work also benefited greatly from conversations with Pol Antras, Adrien Auclert, Arnaud Costinot, Fritz Foley, and from the suggestions of seminar participants at the University of Zurich, Wharton, Berkeley Haas, MIT Sloan, Harvard Business School, Yale SOM, Kellogg, Chicago Booth, UNC Kenan-Flager, Fisher College at Ohio State University, Stanford GSB, ESSEC, Cornell, Dartmouth, Duke, Princeton, and Brigham Young University. All remaining errors are my own. I acknowledge support from the AXA Research Fund and the HEC Paris Foundation.Nonfinancial firms are the main providers of short-term corporate financing to their customers.Accounts payable are three times as large as bank loans and fifteen times as large as commercial paper on the aggregate balance sheet of nonfinancial U.S. businesses. 1 Moreover, interfirm lending finances a disproportionate share of global trade. 2 Yet despite its economic significance, trade credit supply has received little attention relative to firms' other financial and real activities, mainly due to the lack of appropriate empirical setting. 3 In particular, the implications of trade credit provision for firms' corporate liquidity remain poorly understood.While financially stronger firms can extend trade credit to their customers in the form of long payment terms, their financially weaker rivals might expose themselves to liquidity shocks by doing so. Depending on the intensity of competition, they might not be able to pass this excess liquidity risk onto prices. Long payment terms extended by financially stronger firms might thus prevent their constrained rivals from entering, expanding, and surviving in the industry. The main challenge in identifying this mechanism is that firms compete on many dimensions, and that financially stronger firms might have other comparative advantages over their constrained competitors.To solve this identification cha...

The Effect of Bank Supervision on Risk Taking: Evidence from a Natural Experiment

“…In order to avoid a bad control problem, we measure bank-level controls as of December 31, 1982 (prior to the announcement of the relocation) and interact each with our P ost t dummy (Barrot (2016) Including these covariates to capture economic conditions and bank characteristics is intended to mitigate possible biases that may occur if these variables affect Y i,t and are correlated with P ost t × T reatment i , but not considered in the estimation. Finally, we include a full complement of bank and time fixed effects, denoted ψ i and η t , respectively.…”

Can Paying Firms Quicker Affect Aggregate Employment?

“…3 Trade credit claims, recorded as accounts receivable on firms' balance sheets, are typically seen as short-term, liquid, low-risk claims that should be very easy to pledge, and that should not constrain firm growth. Yet recent research as found that long payment terms forces financially constrained firms to cut back investment (Murfin and Njoroge 2014) and exposes them to liquidity risk (Barrot 2015). 4 Our work shows that trade 2 The effect of financing frictions on capital investment has been studied extensively, starting with Fazzari et al (1988), who find a strong positive relationship between cash flows and investment.…”

Introduction to the Special Issue on Research at the Interface of Finance, Operations, and Risk Management (iFORM): Recent Contributions and Future Directions

“…While economics and finance literature offers a variety of theoretical justifications and rich empirical evidence for the use of trade credit (see Smith 1987, Lee and Stowe 1993, Long et al 1993, Petersen and Rajan 1997, Biais and Gollier 1997, Giannetti et al 2011, Klapper et al 2012, Barrot 2016, OM researchers offer new insights by modelling detailed and strategic interactions of the firms in the supply chain. OM research in trade credit has a long history, from early works by Baranek (1967) and Haley and Higgins (1973) to recent papers by Gupta and Wang (2009) and Babich and Tang (2012) (for quick references to work in this area, see Babich et al 2012, Kouvelis andZhao 2012).…”