Suppliers As Liquidity Insurers
58 Pages Posted: 5 Jun 2017 Last revised: 28 Mar 2019
Date Written: March 2019
Using a unique supplier/customer linked dataset for France, we examine how financial constraints of suppliers affect cash holdings at the level of the customer. We show that firms with unconstrained suppliers hold about 10% less cash than firms with constrained suppliers. We rely on matching estimators and on a legal reform in France that resulted in a significant exogenous relaxation of credit constraints for some firms for identification. Consistent with theory, we also show that customers with unconstrained suppliers have more accounts payable and that the reduction in cash holdings is greater for firms with stronger ties to their unconstrained suppliers. This effect persisted during the global financial crisis, highlighting that suppliers may be viable insurers of liquidity even when financing from banks and other external channels is unavailable.
Keywords: supply chain, cash, credit constraints, liquidity insurance
JEL Classification: G30, D92, G20
Suggested Citation: Suggested Citation