Strengthening operational creditor rights and trade credit: Evidence from creditor reforms

Abstract

Trade creditors are exposed to credit risk when they extend credit to their clients during the sale of goods. The present study exploits a regulatory intervention that enhances the rights of trade creditors in cases of default. By leveraging the implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 as a policy intervention, we employ the difference-in-differences (DID) approach to demonstrate that the strengthening of trade creditor rights leads to a rise in the usage of trade credit to financially vulnerable firms. Additionally, our study indicates that financially vulnerable firms experiencing information asymmetry exhibit a more pronounced increase in trade credit. Overall, the paper shows that strong legal protections for trade creditors are essential to trade credit.