Trade credit: Elusive insurance of firm growth

Dennis Bams, Jaap Bos, Magdalena Pisa

Research output: Working paperProfessional

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Abstract

Firms depend heavily on trade credit. This paper introduces a trade credit network into a structural model of the economy. In an empirical analysis of the model, we find that trade credit is an elusive insurance: as long as a firm is financially unconstrained and times are good, more trade credit enhances sales stability and insures against shocks to the firm’s suppliers. However, if a firm becomes financially constrained or times are bad, trade credit fails to insure against supplier shocks. Moreover, if the firm is low on cash, trade credit propagates shocks from a supplier to its customer.
Original languageEnglish
PublisherMaastricht University, Graduate School of Business and Economics
DOIs
Publication statusPublished - 2016

Publication series

SeriesGSBE Research Memoranda
Number029

JEL classifications

  • e32 - "Business Fluctuations; Cycles"
  • g32 - "Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill"
  • l14 - "Transactional Relationships; Contracts and Reputation; Networks"

Keywords

  • trade credit
  • insurance
  • credit chains
  • spillover effects

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