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

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  • Tor Jacobson
  • Erik Schedvin

Abstract

Using an exhaustive data set on claims held by trade creditors (suppliers) on failed trade debtors (customers), we quantify the importance of trade credit chains for the propagation of corporate bankruptcy. We show that trade creditors experience significant trade credit losses due to trade debtor failures and that creditors' bankruptcy risks increase in the size of incurred losses. By exploring the roles of financial constraints and creditor‐debtor dependences, we infer that the trade credit failure propagation mechanism is driven by both credit losses and demand shrinkage. Finally, we show that the documented propagation mechanism constitutes a significant part of the overall bankruptcy frequency, suggesting that it has measurable implications for the aggregate level.

Suggested Citation

  • Tor Jacobson & Erik Schedvin, 2015. "Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis," Econometrica, Econometric Society, vol. 83(4), pages 1315-1371, July.
  • Handle: RePEc:wly:emetrp:v:83:y:2015:i:4:p:1315-1371
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