Access to Debt and the Provision of Trade Credit

40 Pages Posted: 19 Apr 2021 Last revised: 3 Aug 2021

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Kayla Freeman

University of Georgia, Terry College of Business, Department of Finance

Janet Gao

Indiana University - Kelley School of Business

Date Written: August 3, 2021

Abstract

How does access to debt markets affect firms' provision of trade credit? Existing literature focuses on the effect of financial crises and shows that access to bank loans allows firms to provide more trade credit. However, outside of crises, increased access to debt could strengthen a firm’s product market power and reduce the need for them to provide trade credit to major customers. We test this conjecture by exploiting the staggered passage of anti-recharacterization laws as exogenous shocks to firms' access to debt markets and using hand-collected data on the amount of trade credit provided by U.S. public firms to their individual customers. We show that better access to debt reduces firms' extension of trade credit to their major customers, particularly for financially healthy customers with top credit ratings. Consistent with the argument of product market power, we find that firms affected by the laws expand their customer base and deepen relations with riskier customers. The law-induced decline in trade credit leads to reductions in investment and increased borrowing by customer firms. It also leads those customer firms to provide less trade credit to firms further downstream.

Keywords: Trade Credit, Access to Debt, Creditor Rights, Supply-Chain, Bargaining Power

JEL Classification: G32, G33, L14

Suggested Citation

Billett, Matthew T. and Freeman, Kayla and Gao, Janet, Access to Debt and the Provision of Trade Credit (August 3, 2021). Available at SSRN: https://ssrn.com/abstract=3827200 or http://dx.doi.org/10.2139/ssrn.3827200

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Kayla Freeman (Contact Author)

University of Georgia, Terry College of Business, Department of Finance ( email )

Brooks Hall
Athens, GA 30602-6254
United States

HOME PAGE: http://https://sites.google.com/site/kaylafreemanfinance/home

Janet Gao

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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