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Trade credit use as firms approach default: A supplier's hold-up story

Emilia Garcia-Appendini () and Judit Montoriol-Garriga ()
Authors registered in the RePEc Author Service: Judit Montoriol Garriga ()

No 1411, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Using a sample of firms matched with their suppliers, we study the use of trade credit as firms approach a default event. We show that, in the extensive margin, around one third of suppliers exit the relationship well ahead of default, but the rest continue the relationship. Relationships are more likely to continue when suppliers sell differentiated goods, are located close to their distressed clients, sell large proportions to the distressed clients, or when the distressed client is in a concentrated market, suggesting that dependent suppliers are held up in distressed relationships. Firms with suppliers that continue the relationship continue purchasing the same amounts from their suppliers and have larger increases in accounts payable, suggesting that held-up suppliers trade-off the potential benefits of granting concessions to their clients during bad times with the risk of increasing their exposure to a distressed firm.

Keywords: Trade credit; financial distress; lines of credit; hold up (search for similar items in EconPapers)
JEL-codes: G01 G30 G32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-06, Revised 2015-01
New Economics Papers: this item is included in nep-ban
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