Suppliers as financial intermediaries: Trade credit for undervalued firms

Patrice Fontaine and Sujiao Zhao

Journal of Banking & Finance, 2021, vol. 124, issue C

Abstract: We examine the impact of undervaluation on a firm's use of trade credit. To address potential endogeneity bias, we construct our instrumental variable based on mutual fund outflow-driven price pressure, and our undervaluation measure allows us to distinguish misvaluation from fair valuation. We find that a firm's suppliers play an important role in providing temporary bridge financing when the firm is undervalued. The effect varies with the firm's information environment and with its dependence on external finance. In addition, based on a manually matched supplier-customer sample, we show that small customers in long-term relationships with their suppliers are more likely to obtain trade credit when facing stock market undervaluation, while small suppliers with a smaller customer pool extend more trade credit to their undervalued customers.

Keywords: Undervaluation; Trade credit; Information advantage; Implicit equity stake (search for similar items in EconPapers)
JEL-codes: D2 D21 G3 G30 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:124:y:2021:i:c:s0378426621000017

DOI: 10.1016/j.jbankfin.2021.106043

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