The Trade Credit Clearinghouse: Liquidity and Coordination

Abstract

We study the economic effects of a clearinghouse that allows a network of firms to reduce their gross debt burden through netting. The clearinghouse netted a sizable 8% of debt relative to GDP in the analyzed period. Exploiting unique data on the debt network and the clearinghouse algorithm, we identify plausibly exogenous variation in clearing for a particular firm that derives from changes in debts far away in the network. We find that clearing reduces the probability of default, especially for financially distressed and cash poor firms. Consistent with reductions in firm risk, clearing increases sales, while it increases investment only for cash rich firms. We argue that the clearinghouse is an exchange technology that alleviates both "missing market" and coordination failure issues.

Keywords: trade credit, clearinghouse, default, real effects, liquidity, coordination

JEL Classification: D22, G20, G30