Trade Credit Use as Firms Approach Default
53 Pages Posted: 24 Jun 2014 Last revised: 1 May 2018
Date Written: April 30, 2018
Using a sample of distressed firms with information about suppliers, we document an average fall in the use of trade credit as firms approach bank-ruptcy compared to a control sample of non-bankrupt firms. However, we uncover a large degree of heterogeneity across suppliers. Suppliers facing high switching costs maintain their business ties with the distressed firms as they approach bankruptcy, and provide them more trade credit. Suppliers in concentrated markets provide temporary support to their clients. Overall, the findings of this paper show that switching costs are fundamental to ex-plain whether suppliers provide liquidity to their distressed clients or not.
Keywords: Trade credit, bankruptcy, switching costs
JEL Classification: G01, G30, G32
Suggested Citation: Suggested Citation