Shock Propagation Through Trade Credit: Evidence From Operation Weak Flesh
50 Pages Posted: 2 Dec 2018 Last revised: 26 Jan 2019
Date Written: January 24, 2019
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: Suggested Citation