Suppliers as liquidity insurers

Daniel Corsten, Reint Gropp and Panos Markou

No 8/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We examine how financial constraints in portfolios of suppliers affect cash holdings at the level of the customer. Utilizing a data set of private and public French companies and their suppliers, we show that customers rely on their financially unconstrained suppliers to provide them with backup liquidity, and that they stockpile approximately 10% less cash than customers with constrained suppliers. This effect persisted during the global financial crisis, highlighting that suppliers may be viable insurers of liquidity even when financing from banks and other external channels is unavailable. We further show that customers with unconstrained suppliers also simultaneously receive more trade credit; that the reduction in cash holdings is greater for firms with stronger ties to their unconstrained suppliers; and that customers reduce their cash holdings following a significant relaxation in their suppliers' financial constraints through an IPO. Taken together, the results provide important nuance regarding the implications of supplier portfolios and financial constraints on firm liquidity management.

Keywords: supply chain; cash; credit constraints; liquidity insurance (search for similar items in EconPapers)
JEL-codes: D92 G20 G30 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:82017

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