Shock Propagation Through Trade Credit: Evidence From Operation Weak Flesh

50 Pages Posted: 2 Dec 2018 Last revised: 26 Jan 2019

See all articles by Victor Dahan

Victor Dahan

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Date Written: January 24, 2019

Abstract

We investigate whether and how shocks propagate through trade credit. We exploit a large negative liquidity shock to firms in the Brazilian food industry, resulting from the announcement of a fraud investigation named Operation Weak Flesh. Using a differences-in-differences analysis, we show that quarterly accounts payable of the affected firms drop by 20-30 percent. Their suppliers reduce the provision of trade credit by 5-6 percent. The evidence suggests that risk mitigation concerns dominate business relationship concerns or bargaining power effects. Suppliers mitigate the increased credit risk in the supply chain rather than supporting their customers with additional trade credit.

Keywords: Trade Credit, Corporate Liquidity, Supply Chain, Corporate Fraud, Spillover Effects

JEL Classification: G30, G32

Suggested Citation

Dahan, Victor and Norden, Lars, Shock Propagation Through Trade Credit: Evidence From Operation Weak Flesh (January 24, 2019). Available at SSRN: https://ssrn.com/abstract=3274636 or http://dx.doi.org/10.2139/ssrn.3274636

Victor Dahan

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Brazil

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

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