Trade Credit and Industry Dynamics: Evidence from Trucking Firms: Trade Credit and Industry Dynamics

By Jean-Noël Barrot. 2015

190 citations recorded by the source corpus.

Long payment terms are a strong impediment to the entry and survival of liquidity constrained firms. To test this idea and its implications, I consider the effect of a reform restricting the trade credit supply of French trucking firms. In a difference-in-differences setting, I find that trucking firms’ corporate default probability drops by one-fourth following the restriction. The effect is persistent, concentrated among liquidity constrained firms, and not offset by a drop in profits. The restriction also triggers an increase in the entry of small trucking firms. JEL classification: G32, G33, G34, D23 ∗MIT Sloan School of Management. Email: jnbarrot@mit.edu. I am indebted to Antoinette Schoar and David Thesmar for their invaluable guidance and support. I am grateful to Michael Roberts (the editor) as well as two anonymous referees for their suggestions. I thank Francois Derrien, Laurent Fresard, Denis Gromb, Uli Hege, Augustin Landier, Clemens Otto, and Mitchell Petersen for their very helpful comments in the early stages of this project. I am deeply grateful to Claire Lelarge for her insights and assistance with the data. This work also benefited greatly from conversations with Pol Antras, Adrien Auclert, Arnaud Costinot, Fritz Foley, and from the suggestions of seminar participants at the University of Zurich, Wharton, Berkeley Haas, MIT Sloan, Harvard Business School, Yale SOM, Kellogg, Chicago Booth, UNC Kenan-Flager, Fisher College at Ohio State University, Stanford GSB, ESSEC, Cornell, Dartmouth, Duke, Princeton, and Brigham Young University. All remaining errors are my own. I acknowledge support from the AXA Research Fund and the HEC Paris Foundation. Nonfinancial firms are the main providers of short-term corporate financing to their customers. Accounts payable are three times as large as bank loans and fifteen times as large as commercial paper on the aggregate balance sheet of nonfinancial U.S. businesses.1 Moreover, interfirm lending finances a disproportionate share of global trade.2 Yet despite its economic significance, trade credit supply has received little attention relative to firms’ other financial and real activities, mainly due to the lack of appropriate empirical setting.3 In particular, the implications of trade credit provision for firms’ corporate liquidity remain poorly understood. While financially stronger firms can extend trade credit to their customers in the form of long payment terms, their financially weaker rivals might expose themselves to liquidity shocks by doing so. Depending on the intensity of competition, they might not be able to pass this excess liquidity risk onto prices. Long payment terms extended by financially stronger firms might thus prevent their constrained rivals from entering, expanding, and surviving in the industry. The main challenge in identifying this mechanism is that firms compete on many dimensions, and that financially stronger firms might have other comparative advantages over their constrained competitors. To solve this identification challenge, I exploit a large and exogenous restriction on trade credit supply. I consider a trade credit regulation reform enacted in 2006 that prevented French trucking firms from agreeing with their customers to payment terms in excess of thirty days. This resulted in a significant drop by 15% in payment terms relative to their pre-reform level. I use a unique dataset covering the universe of all French firms and implement a difference-in-differences (DID) approach to estimate the effect of this trade credit restriction on trucking firms’ corporate policies, entry and exit. To do so, I compare the performance of trucking firms to the performance of a control group including all industries that do not use trucking services and have similar customers and suppliers as trucking firms. I confirm that all results are robust to using an alternative control group constructed by matching each trucking firm with a non-trucking firm with similar firm-level characteristics, such as size, profitability, tangibility, leverage, and trade credit supply.4 I first ask whether long payment terms impose a liquidity risk on firms, especially financially constrained ones. There is no obvious reason a priori that this should be the case. Accounts receivable are typically considered as liquid assets that should be converted into cash relatively easily in the event of a liquidity shock. In addition, financially constrained firms might extend shorter payment terms than unconstrained ones in order to avoid begin exposed to excessive liquidity risk.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/94313a1eb9fc0b69649504da5fa22a20f47a474f

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Economics and Econometrics

Citations in the corpus

Trade credit and supplier competition (2019, background): “…by multiple competing suppliers, our study complements Brennan, Maksimovic, and Zechner (1988), who show how suppliers can use trade credit to achieve market segmentation, and Barrot (2016), who documents how imposition of exogenous constraints on trade creditors affects their competitors.”
The differential impact of leverage on the default risk of small and large firms (2020, background): “The finance literature has investigated firms’ use of trade credit and the effect of regulatory restrictions on trade credit.1 Barrot (2016), for example, shows that after the introduction of maturity restrictions on trade credit extended by French trucking firms, the probability of a trucking firm…”
The influence of economic policy uncertainty on corporate trade credit and firm value (2020, background): “Conversely, financially constrained supplier firms would find it costlier to extend trade credit to customers (Murfin and Njoroge, 2015; Barrot, 2016).”