Bankruptcy in Credit Chains
When ﬁrms use bank oans and trade credit,bankruptcy rules can magnify aggregate ﬂuctuations.A priori,a rule where banks are senior is not appropriate to dampen ﬂuctuations.It might force trade creditors into bankruptcy by triggering a ‘domino e ﬀect ’-when ﬁrms go bust because their clients default.Yet,banks are often senior.In this paper,we characterize the conditions under which such a rule limits the likelihood of bankruptcies.We model a credit chain where in equilibrium ﬁrms use trade credit and bank loans.Due to the credit chain,bank seniority minimizes the overall risk premium charged by trade creditors and banks.Although bank seniority magni ﬁes the domino e ﬀect,we ﬁnd it is optimal whenever there is a relatively high proportion of bad risks
|Date of creation:||11 Aug 2004|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
References listed on IDEAS
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.:
- J. Stephen Ferris, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 243-270.
- Mitchell A. Petersen & Raghuram G. Rajan, 1996.
"Trade Credit: Theories and Evidence,"
NBER Working Papers
5602, National Bureau of Economic Research, Inc.
- Burkart, Mike & Ellingsen, Tore, 2002.
CEPR Discussion Papers
3536, C.E.P.R. Discussion Papers.
- Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-937.
- Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-1141, December.
- Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 209-225, June.
When requesting a correction, please mention this item's handle: RePEc:ecm:nawm04:133. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.