Trade credit: Elusive insurance of firm growth

Dennis Bams, J. Bos and Magdalena Pisa
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Dennis Bams: Finance, RS: GSBE EFME

No 29, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

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.

JEL-codes: E32 G32 L14 (search for similar items in EconPapers)
Date: 2016-01-01
New Economics Papers: this item is included in nep-ias and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:unm:umagsb:2016029

DOI: 10.26481/umagsb.2016029

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