Cash Collateral, Creditor Rights, and the Provision of Trade Credit

Abstract

How does access to debt markets affect firms' provision of trade credit? Existing literature focuses on the effect of financial crises and shows that access to bank loans allows firms to provide more trade credit. However, outside of crises, increased access to debt could strengthen a firm’s product market power and reduce the need for them to provide trade credit to major customers. We test this conjecture by exploiting the staggered passage of anti-recharacterization laws as exogenous shocks to firms' access to debt markets and using hand-collected data on the amount of trade credit provided by U.S. public firms to their individual customers. We show that better access to debt reduces firms' extension of trade credit to their major customers, particularly for financially healthy customers with top credit ratings. Consistent with the argument of product market power, we find that firms affected by the laws expand their customer base and deepen relations with riskier customers. The law-induced decline in trade credit leads to reductions in investment and increased borrowing by customer firms. It also leads those customer firms to provide less trade credit to firms further downstream.