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.

Credit Risk Assessment Model for Small and Micro-Enterprises: The Case of Lithuania

“…Consistent with this argument, the researchers conclude that such credit losses could, in turn, influence trading creditors to become insolvent and subsequently go bankrupt. The conclusion is confirmed by Jacobson and von Schedvin's (2015) performed research, wherein scientists emphasize that corporate failures in the corporate sector result in significantly higher credit losses than in the banking sector. The findings are based on an empirical study (Jacobson and von Schedvin 2015), which states that the aggregate annual credit loss incurred by Swedish trade creditors is around 50 percent higher than Swedish bank lending to non-financial corporations.…”

“…The conclusion is confirmed by Jacobson and von Schedvin's (2015) performed research, wherein scientists emphasize that corporate failures in the corporate sector result in significantly higher credit losses than in the banking sector. The findings are based on an empirical study (Jacobson and von Schedvin 2015), which states that the aggregate annual credit loss incurred by Swedish trade creditors is around 50 percent higher than Swedish bank lending to non-financial corporations. This indicates that trade creditors (suppliers) need a tool to help identify the credit risk of trade credit debtors (customers).…”

“…Prior studies show that a trade credit debtor (customer) in a bankruptcy process will almost certainly fail to meet the claims of its trade creditors (suppliers), thereby causing credit losses (Jacobson and von Schedvin 2015;Wang et al 2018). Consistent with this argument, the researchers conclude that such credit losses could, in turn, influence trading creditors to become insolvent and subsequently go bankrupt.…”

Do corporate websites’ changes reflect firms’ survival?

“…In a first approach, firms’ survival was studied by multi-period logistic regression models. These models are useful for examining how some independent variables are related to a dependent variable when the data used as input include individuals observed over time, which was the case of the present study, and have been applied successfully in existing firms’ survival studies (Bridges and Guariglia, 2008; Jacobson and von Schedvin, 2015).…”

Economic system entanglement on intra-firm trade portfolios: the impact of counterparty credit ratings on business-to-business credit dynamics

“…Indeed, business will experience further repercussions due to these disruptions, as the unexpected losses negatively impact its ability to meet the terms of supply for other enterprises , who will then strategically concentrate payments toward other supplying companies and paradoxically create an ipso facto exacerbation of their own insolvency status relative to . At the same time, regular debtor companies will be similarly affected by the inconstancy of the supply relationship and begin to delay their payments [18].…”