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Activity shocks and corporate liquidity: the role of trade credit

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  • Benjamin Bureau
  • Anne Duquerroy
  • Frédéric Vinas

Abstract

We show both theoretically and empirically how trade credit financing may magnify the impact of activity shocks on corporate liquidity. Using unique daily data on payment defaults on suppliers in France, we quantify the magnitude of the short-term cyclical liquidity stress induced by trade payment obligations, exploiting the Covid-19 crisis as an exogenous shock. A one standard deviation rise in net trade credit position increases firm’s default probability by 10% during the lockdown. We find higher impacts for downstream sectors — up to 30% increase in the retail trade – for financially constrained firms, and a contraction in investment.

Suggested Citation

  • Benjamin Bureau & Anne Duquerroy & Frédéric Vinas, 2021. "Activity shocks and corporate liquidity: the role of trade credit," Working papers 851, Banque de France.
    • Handle: RePEc:bfr:banfra:851
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    References listed on IDEAS

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    9. Lilas Demmou & Guido Franco & Sara Calligaris & Dennis Dlugosch, 2022. "Liquidity Shortfalls during the COVID 19 Outbreak: Assessment and Policy Responses," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 532-33, pages 47-61.
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    Cited by:

    1. Srivastava, Jagriti & Gopalakrishnan, Balagopal, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," MPRA Paper 111433, University Library of Munich, Germany, revised Dec 2021.
    2. Srivastava, Jagriti & Gopalakrishnan, Balagopal, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," MPRA Paper 108951, University Library of Munich, Germany.
    3. Zhang, Cheng & Lee, Yun-Chi & Ho, Kung-Cheng & Shen, Xixi, 2023. "Influence of institutional differences on trade credit use during pandemics," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    4. Wang, Xun & Yu, Jingwen, 2023. "COVID-19 pandemic and corporate liquidity: The role of SOEs’ trade credit response," Journal of International Money and Finance, Elsevier, vol. 137(C).

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    More about this item

    Keywords

    Firm; Corporate Finance; Trade Credit; Liquidity; Payment Default; Covid-19; Lockdown; Pandemic;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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