Access to Debt and the Provision of Trade Credit

48 Pages Posted: 23 Nov 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: November 18, 2021

Abstract

How does access to debt markets affect firms' provision of trade credit? While better access to credit may facilitate trade credit provision during banking crises, outside of crises, increased debt capacity could strengthen a firm's bargaining power relative to major customers and relieve the pressure for them to provide trade credit to those customers. We test this conjecture using hand-collected trade credit data between pairs of U.S. public firms. Using the staggered passage of anti-recharacterization laws as exogenous shocks to firms' access to debt, we show that better access to debt reduces firms’ extension of trade credit to their major customers. The reduction in trade credit provision is more pronounced in pairs where the (treated) supplier's industry is more dependent on the customer's. Within the same supplier firm, less trade credit is provided to financially healthy customers, who likely possess stronger bargaining power prior to the laws. Firms affected by the laws expand their customer base and deepen relations with riskier customers. Facing a tightening of trade credit, customers scale back investment and rely more on external debt. They also 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 (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3966713 or http://dx.doi.org/10.2139/ssrn.3966713

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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