Trade Credit During Financial Crisis: Do Market Power and Financial Constraints Matter?

Abstract

This paper investigates whether market power affects trade credit decisions. We explore several financial crises in Argentina, Brazil, Mexico and the US that work as exogenous shocks to the supply of short and long term financing for nonfinancial firms. We find that firms with high market power increase the supply of net trade credit to their customers during and after a financial crisis, whereas firms with low market power reduce net trade credit terms offered to their clients. The effects of market power and financial constraints work as separate channels in the trade credit policy decisions. Our results contribute with the previous literature by documenting an effect of product market competition on trade credit decisions.

Keywords: trade credit, market power, financial crisis

JEL Classification: G01, G30