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

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  • Jacobson, Tor

    () (Research Department, Central Bank of Sweden)

  • von Schedvin, Erik

    () (Research Department, Central Bank of Sweden)

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    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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    Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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    Related research

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

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    1. Frederic Boissay & Reint Gropp, 2007. "Trade credit defaults and liquidity provision by firms," Working Paper Series 753, European Central Bank.
    2. Frederic Boissay, 2006. "Credit chains and the propagation of financial distress," Working Paper Series 573, European Central Bank.
    3. 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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