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Investment of financially distressed firms: The role of trade credit

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  • Ferrando, Annalisa
  • Wolski, Marcin

Abstract

We study the relationship between net trade credit and firms' investment levels, focusing on financially distressed firms. First, we introduce a theoretical model to predict the role played by net trade credit as a coordination device differentiating firms by their degree of financial distress. Then, we test these predictions by using a large panel of more than 10 million firms in 23 EU countries over the period 2004-2014. Our main result is that, whereby net trade credit has an overall negative impact on capital formation due to liquidity effects, the effect is less pronounced for firms that are in financial difficulties. The main explanation is that through capital expenditures distressed companies try to maintain vital business relations with their customers in order to participate in the final profits via trade credit repayments.

Suggested Citation

  • Ferrando, Annalisa & Wolski, Marcin, 2018. "Investment of financially distressed firms: The role of trade credit," EIB Working Papers 2018/04, European Investment Bank (EIB).
    • Handle: RePEc:zbw:eibwps:201804
    DOI: 10.2867/854592
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    References listed on IDEAS

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    Cited by:

    1. Stefano Filomeni & Michele Modina & Elena Tabacco, 2023. "Trade credit and firm investments: empirical evidence from Italian cooperative banks," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 1099-1141, April.
    2. Barbiero, Francesca & Popov, Alexander & Wolski, Marcin, 2020. "Debt overhang, global growth opportunities, and investment," Journal of Banking & Finance, Elsevier, vol. 120(C).
    3. Maurin, Laurent & Wolski, Marcin, 2021. "Aggregate productivity slowdown in Europe: New evidence from corporate balance sheets," EIB Working Papers 2021/04, European Investment Bank (EIB).
    4. Amamou, Raschid & Gereben, Áron & Wolski, Marcin, 2020. "Making a difference: Assessing the impact of the EIB's funding to SMEs," EIB Working Papers 2020/04, European Investment Bank (EIB).
    5. Raschid Amamou & Áron Gereben & Marcin Wolski, 2023. "Assessing the impact of the EIB’s intermediated lending to SMEs during funding shocks," Small Business Economics, Springer, vol. 60(3), pages 975-1007, March.
    6. Ferrando, Annalisa & Pal, Rozalia & Durante, Elena, 2019. "Financing and obstacles for high growth enterprises: The European case," EIB Working Papers 2019/03, European Investment Bank (EIB).

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    More about this item

    Keywords

    trade credit; investment; financial constraints; distressed firms;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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