Strengthening operational creditor rights and trade credit: Evidence from creditor reforms

Ranjeet Singh, Yogesh Chauhan, Nemiraja Jadiyappa and Anto Joseph

Pacific-Basin Finance Journal, 2024, vol. 83, issue C

Abstract: Trade creditors are exposed to credit risk when they extend credit to their clients during the sale of goods. The present study exploits a regulatory intervention that enhances the rights of trade creditors in cases of default. By leveraging the implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 as a policy intervention, we employ the difference-in-differences (DID) approach to demonstrate that the strengthening of trade creditor rights leads to a rise in the usage of trade credit to financially vulnerable firms. Additionally, our study indicates that financially vulnerable firms experiencing information asymmetry exhibit a more pronounced increase in trade credit. Overall, the paper shows that strong legal protections for trade creditors are essential to trade credit.

Keywords: Insolvency and bankruptcy code; India; Trade credit; Distressed firms; Financially vulnerable firms; Difference-in-differences; Operational creditors rights; The redistribution hypothesis (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x24000015

DOI: 10.1016/j.pacfin.2024.102250

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