Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly pro…table, and enhanced in R&D intense industries and during economic downturns. Terms of use: Documents inKeywords: Trade credit; Credit chains; Bankruptcy; Contagion JEL: G30; G33 Discussions with and suggestions from Roc Armenter, Mikael Carlsson, Satyajit Chatterjee, Hans Degryse, Reint Gropp, Thomas Jansson, Nobu Kiyotaki, Judit Montoriol-Garriga, Leonard Nakamura, Steven Ongena, Fabiana Penas, Gregory Udell and Jason Wei have been very helpful in improving upon earlier drafts. We are also grateful for comments from seminar participants at Sveriges Riksbank. We are indebted to Tommy von Brömsen for providing outstanding research assistance. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as re ‡ecting the views of the Executive Board of Sveriges Riksbank.y Research Division, Sveriges Riksbank.

On the Direct and Indirect Real Effects of Credit Supply Shocks

“…29 Alternatively, trade credit may also explain upstream propagation of financial shocks if debtor (customer) failure triggers supplier's losses through both credit losses and demand shrinkage (see for instance Jacobson and Schedvin (2015)). However, we focus here in downstream propagation because our evidence for upstream effects is rather mixed.…”

“…Turning to the mechanisms explaining propagation of financial shocks through buyer-seller relations, Costello (2017) documents that firms with greater exposure to a large decline in bank lending reduced the trade credit extended to their customers resulting in negative effects on their real outcomes. Trade credit may also explain upstream propagation of financial shocks if debtor (customer) failure triggers supplier's losses through both credit losses and demand shrinkage (see for instance Jacobson and Schedvin (2015)). While we provide evidence in favor of the downstream propagation mechanism in Costello (2017), it does not explain the whole effect of our estimates.…”

The Effect of Interfirm Financial Transactions on the Credit Risk of Small and Medium-Sized Enterprises

“…Most of these references have developed theoretical models and studied under which conditions local failures can result in avalanches of shortage and failures across the network (Delli Gatti et al ., ; Weisbuch and Battiston, ). Some empirical studies have focused on testing the trade credit propagation hypothesis, exploring whether firms that issue more trade credit are more likely to experience a debtor failure (Jacobson et al ., ; Jacobson and von Schedvin, ). Few recent studies have considered incorporating information on firms’ interdependence in a default prediction model.…”

“…Such credit risk contagion may be amplified by the use of trade credit, which allows the purchase of products and services without immediate cash payment, potentially leading to non‐payments by trade debtors (Bradley and Rubach, ). In a networked economy, the failure of one firm can have a snowball effect, causing failure of other companies, and in extreme cases causing an avalanche of failures, known as a bankruptcy chain (Delli Gatti et al ., ; Jacobson and von Schedvin, ). Hurd () provided an exposition on mathematical stochastic models of contagion and cascades in the context of systemic risk and recent work proposes models that are specific to the case of credit risk (Petrone and Latora, ).…”

The Origins of Aggregate Fluctuations in a Credit Network Economy

“…This corresponds to the standard input-output channel represented by the blue arrow. 31 In the absence of the credit linkage channel of transmission, firms in the utilities industry will remain largely However, the shock causes petroleum and coal manufacturers to reduce the up front payments they make to their oil and gas suppliers. With tighter financial constraints, these suppliers reduce production, raising the price of oil and gas.…”