Trade Credit, Demand Shocks, and Liquidity Management

Abstract

We use the 2007-09 financial crisis and recession as a natural experiment to test trade credit theories. High-demand firms become more constrained relative to their investment needs, do not provide additional liquidity to their suppliers, and increase acquisition activities once the liquidity crunch dissipates. These firms' accounts payable increase proportionally to their raw-material inventories, consistent with the transactions-based theories of trade credit. Thus, relationship-based liquidity provision from customers is unlikely to be a significant factor in financing suppliers during crises.

Keywords: Financial Crisis, Demand Shocks, Trade Credit, Inventory