Trade credit supply and financial distress outcomes: evidence from Australian voluntary administrations

Abstract

PurposeThe objective of this study is to investigate the relationship between trade credit supply and financial distress outcomes, considering the role that trade credit plays as a substantial source of liquidity for distressed companies. Specifically, it examines whether there is an association between trade credit supply and the outcomes experienced by companies that undergo the voluntary administration (VA) insolvency procedure under Australian corporate law.Design/methodology/approachThe study examines a sample of companies that were listed on the Australian Securities Exchange and entered VA between 2002 and 2019. Ordered logistic regression is used to determine the relation between trade credit and VA outcomes. The VA outcomes considered are as follows: (1) company liquidation, (2) orderly dissolution through an agreement with creditors, or (3) an agreement with creditors for reorganization of all or part of the company's business.FindingsThe findings show that trade creditors' willingness to supply credit is influenced by their rational expectations about the future prospects of financially distressed customers. Higher levels of trade credit and an increase in trade credit supply prior to VA are associated with a greater probability of achieving a reorganization versus a liquidation or dissolution outcome.Originality/valueThere is no apparent prior study investigating the connection between trade credit supply and outcomes for distressed companies entering insolvency administration. Therefore, this study provides novel evidence on the role of trade credit in the context of financial distress. Understanding the relationship between trade credit supply and outcomes is particularly significant considering that many jurisdictions offer distressed companies the opportunity to pursue reorganization under their insolvency laws. Examining financial distress and trade credit in the Australian creditor-friendly context expands on existing research. Prior research has predominantly relied on data from the United States, which has debtor-friendly bankruptcy law. Consequently, these studies may lack generalizability to jurisdictions with creditor-friendly law such as Australia.

Enhancing creditor decision-making in South African business rescue proceedings: a comprehensive analysis of information requirements in business rescue plans

“…Consistent with Le Roux and Duncan (2013), smaller creditors were at a positional and informational disadvantage in rescue proceedings because of their limited resources and power. This finding starkly contradicts the results of Routledge's (2023) study of 142 publicly listed companies undergoing voluntary administration in Australia. The author argued that trade creditors have an information advantage and low monitoring costs because of their close relationship with companies, which enables them to support reorganisation as it provides higher returns and the prospect that trade creditors will secure future business with the customer.…”

“…Participants considered the moral dilemma associated with liquidations and pursued business rescue to protect not only employees but also unsecured creditors and suppliers who would receive nothing if the company was liquidated. Consistent with Routledge's (2023) findings in Australia, this moral dilemma was also compounded by the fact that not supporting rescue efforts may be counterproductive and disruptive, as this could also lead to a contagion of failure among interconnected suppliers in trade credit chains. This situation could potentially lead to other insolvenciesespecially among non-diversified creditors, who are highly exposed to the debtor's default (Gurrea-Martinez, 2023).…”