Increased Creditor Protection in Bankruptcy and Trade Credit: Evidence from the 2005 BAPCPA
51 Pages Posted: 4 Jan 2018 Last revised: 16 Apr 2018
Date Written: December 29, 2017
We examine whether the increased creditor protection under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) affects suppliers’ provision of trade credit to their customers with high default risk. Employing a difference-in-differences analysis for a sample of U.S. public firms during 2002-2008, we find that suppliers whose customers have high default risk extend more trade credit after BAPCPA. We also find that this relation exists when suppliers have stronger reliance on their customers. Overall, our results indicate that the increased creditor protection in bankruptcy induces suppliers to offer more trade credit to customers with high default risk during the ordinary course of business. Our findings have policy implications given the heated debate over the BAPCPA’s effect on Chapter 11 bankruptcy process.
Keywords: Bankruptcy risk, Creditor right protection, Trade credit
JEL Classification: G32, G33
Suggested Citation: Suggested Citation