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Debt Structure and Bankruptcy of Financially Distressed Small Businesses

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  • TSURUTA Daisuke
  • Peng XU
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    Abstract

    Using a large sample of financially distressed small firms in Japan, we find that a distressed firm goes bankrupt faster if it uses proportionately more trade credits. Financially distressed firms experiencing a sharp decrease in trade payables are also more likely to go bankrupt. This suggests that coordination failure among a large number of dispersed trade creditors contributes to the bankruptcy of financially distressed firms. This finding supports the hypothesis that suppliers have an incentive to acquire credit information on distressed firms, and are able to do so more quickly than banks. Accordingly, they withdraw credits more quickly because trade credits, unlike bank loans, are unsecured.

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    File URL: http://www.rieti.go.jp/jp/publications/dp/07e032.pdf
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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 07032.

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    Length: 27 pages
    Date of creation: May 2007
    Date of revision:
    Handle: RePEc:eti:dpaper:07032

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    Cited by:
    1. TSURUTA Daisuke, 2009. "Customer Relationships and the Provision of Trade Credit during a Recession," Discussion papers 09043, Research Institute of Economy, Trade and Industry (RIETI).

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