Econometrica: Jul, 2015, Volume 83, Issue 4
Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis
T. Jacobson and E. von Schedvin
Using an exhaustive data set on claims held by trade creditors (suppliers) on failed trade debtors (customers), we quantify the importance of trade credit chains for the propagation of corporate bankruptcy. We show that trade creditors experience significant trade credit losses due to trade debtor failures and that creditors' bankruptcy risks increase in the size of incurred losses. By exploring the roles of financial constraints and creditor‐debtor dependences, we infer that the trade credit failure propagation mechanism is driven by both credit losses and demand shrinkage. Finally, we show that the documented propagation mechanism constitutes a significant part of the overall bankruptcy frequency, suggesting that it has measurable implications for the aggregate level.
Supplement to "Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis"
This zip file contains the replication files for the manuscript.