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Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

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Author Info

  • Jacobson, Tor

    ()
    (Research Department, Central Bank of Sweden)

  • von Schedvin, Erik

    ()
    (Research Department, Central Bank of Sweden)

Abstract

We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly profitable, and enhanced in R&D intense industries and during economic downturns.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 263.

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Length: 51 pages
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:hhs:rbnkwp:0263

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Web page: http://www.riksbank.com/
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Related research

Keywords: Trade credit; Credit chains; Bankruptcy; Contagion;

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  1. Boissay, Frédéric, 2006. "Credit chains and the propagation of financial distress," Working Paper Series, European Central Bank 0573, European Central Bank.
  2. Boissay, Frédéric & Gropp, Reint, 2007. "Trade credit defaults and liquidity provision by firms," Working Paper Series, European Central Bank 0753, European Central Bank.
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  4. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2007. "Credit chains and bankruptcy propagation in production networks," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(6), pages 2061-2084, June.
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