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

Tor Jacobson () and Erik von Schedvin ()
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Tor Jacobson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 263, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

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.

Keywords: Trade credit; Credit chains; Bankruptcy; Contagion (search for similar items in EconPapers)
JEL-codes: G30 G33 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2012-08-01
New Economics Papers: this item is included in nep-int and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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