Is Trade Credit Insurance of Equal Importance to All Firms?

51 Pages Posted: 25 Jun 2023 Last revised: 5 Aug 2023

See all articles by Mostafa Aghasian

Mostafa Aghasian

Université Paris Dauphine - PSL Research University

Date Written: February 1, 2022

Abstract

To what extent does the reduction of financial risk management instruments in the market impact firms' economic decisions? In this study, we examine the influence of changes in the availability of trade credit insurance services on firms' trade credit provision, using a large sample of firms across 19 countries in the Euro Area. By using the mandatory implementation of Solvency II regulations as an exogenous event affecting insurance companies' underwriting activities, we uncover a detrimental effect of this shock on firms' real economic decisions, specifically in terms of trade credit provision. The introduction of precautionary regulations restricts risk-taking by trade credit insurance underwriters, thereby impacting trade credit operations in countries with higher reliance on insurance services. Notably, these findings are more pronounced for firms in industries that more heavily depend on insurance services, possess larger market presence within their respective industries, and display stronger correlation with their industry's trend of insurance service dependence. Furthermore, our analysis reveals a relationship between reduced trade credit insurance activities and the firms' sales growth, following similar patterns.

Keywords: Trade Credit; trade credit insurance; prudential regulations; Solvency II; uncertainty and risk.

JEL Classification: G22, G28, G32, D80

Suggested Citation

Aghasian, Mostafa, Is Trade Credit Insurance of Equal Importance to All Firms? (February 1, 2022). Université Paris-Dauphine Research Paper No. 4483017, Available at SSRN: https://ssrn.com/abstract=4483017 or http://dx.doi.org/10.2139/ssrn.4483017

Mostafa Aghasian (Contact Author)

Université Paris Dauphine - PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris cedex 16, 75775
France

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