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Trade credit: Elusive insurance of firm growth

Author

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  • Bams, Dennis

    (Finance, RS: GSBE EFME)

  • Bos, Jaap

    (Finance, RS: GSBE EFME)

  • Pisa, Magdalena

Abstract

Firms depend heavily on trade credit. This paper introduces a trade credit network into a structural model of the economy. In an empirical analysis of the model, we find that trade credit is an elusive insurance: as long as a firm is financially unconstrained and times are good, more trade credit enhances sales stability and insures against shocks to the firm’s suppliers. However, if a firm becomes financially constrained or times are bad, trade credit fails to insure against supplier shocks. Moreover, if the firm is low on cash, trade credit propagates shocks from a supplier to its customer.

Suggested Citation

  • Bams, Dennis & Bos, Jaap & Pisa, Magdalena, 2016. "Trade credit: Elusive insurance of firm growth," Research Memorandum 029, Maastricht University, Graduate School of Business and Economics (GSBE).
    • Handle: RePEc:unm:umagsb:2016029
    DOI: 10.26481/umagsb.2016029
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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