Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis
AbstractWe 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 InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 263.
Length: 51 pages
Date of creation: 01 Aug 2012
Date of revision:
Trade credit; Credit chains; Bankruptcy; Contagion;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-06 (All new papers)
- NEP-INT-2012-10-06 (International Trade)
- NEP-RMG-2012-10-06 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boissay, Frédéric & Gropp, Reint, 2007.
"Trade credit defaults and liquidity provision by firms,"
Working Paper Series
0753, European Central Bank.
- Frederic Boissay & Reint Gropp, 2007. "Trade Credit Defaults and Liquidity Provision by Firms," Working Paper Series: Finance and Accounting 179, Department of Finance, Goethe University Frankfurt am Main.
- Boissay, Frédéric, 2006. "Credit chains and the propagation of financial distress," Working Paper Series 0573, European Central Bank.
- 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, vol. 31(6), pages 2061-2084, June.
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