Access to Debt and the Provision of Trade Credit

Abstract

We examine how access to debt markets affects firms' provision of trade credit. Using hand-collected data on trade credit between customer-supplier pairs, we show that increased access to debt strengthens firms' bargaining power relative to major customers and reduces the trade credit they provide to those customers. We establish causality using the staggered passage of anti-recharacterization laws that increased firms’ debt capacity. Affected firms expand their customer base, reduce customer concentration, and decrease trade credit to powerful customers. The decline in trade credit leads customers to cut investment, increase leverage, and scale back trade credit provision to firms further downstream.

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

JEL Classification: G32, G33, L14