Curbing Shocks to Corporate Liquidity: The Role of Trade Credit

"Curbing Shocks to Corporate Liquidity: The Role of Trade Credit"  Niklas Amberg, Tor Jacobson, Erik von Schedvin, Robert M. Townsend, NBER Working Paper No.22286, 2016. ABSTRACT PDF

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2016

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Using data on exogenous liquidity shortfalls generated by the fraud and failure of a cash-in-transit firm, we demonstrate a causal effect on firms’ trade credit usage. We find that firms manage liquidity shortages by increasing the amount of drawn credit from suppliers and decreasing the amount issued to customers. The compounded trade credit adjustments are of a similar size as corresponding adjustments in cash holdings, suggesting that trade credit positions are economically important sources of reserve liquidity for firms. The underlying mechanism in trade credit adjustments is in part due to shifts in credit durations—both upstream and downstream.