Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

45 Pages Posted: 25 Mar 2014 Last revised: 20 Jan 2017

See all articles by Emily Breza

Emily Breza

Columbia University - Columbia Business School, Finance; Columbia University - Columbia Business School, Finance

Andres Liberman

Betterfly

Date Written: March 24, 2014

Abstract

We present evidence that restrictions to the set of feasible financial contracts affect buyer - supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within-product differences-in-differences identification strategy, we find that the restriction reduces the likelihood of trade by 11 percentage points. The large retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find evidence that relational contracts can help mitigate the inability to extend long trade credit terms.

Keywords: Organizational Form, Trade Credit, Vertical Integration

JEL Classification: D23, G30, L14, L15, L22

Suggested Citation

Breza, Emily and Breza, Emily and Liberman, Andres, Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit (March 24, 2014). Journal of Finance, February (2017), 72(1), 291–324, Available at SSRN: https://ssrn.com/abstract=2413952 or http://dx.doi.org/10.2139/ssrn.2413952

Emily Breza (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Andres Liberman

Betterfly ( email )

Santiago
Chile

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