Trade Credit and Industry Dynamics: Evidence from Trucking Firms
57 Pages Posted: 4 Oct 2013 Last revised: 30 May 2015
Date Written: January 1, 2015
Financial strength enhances firms' ability to extend trade credit, which confers a comparative advantage in the product market. To test this idea and its implications, I consider the effect of an exogenous restriction on the trade credit supplied by French trucking firms. In a difference-in-differences setting, I find that trucking firms' corporate default probability drops by one-fourth. The effect is persistent, concentrated among financially constrained firms, and not offset by a drop in profits. The reform also triggers an increase in the entry of small trucking firms, which are as efficient as those set up prior to the reform. Overall, the results indicate that long payment terms are a strong impediment to the entry and survival of constrained firms.
Keywords: Trade credit, investment, default risk, product market competition
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