Trade Credit and Industry Dynamics: Evidence from Trucking Firms

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 decreases by 25% following the restriction. The effect is persistent, concentrated among liquidity-constrained firms, and not offset by a decrease in profits. The restriction also triggers an increase in the entry of small trucking firms.

[1]  Alberto Fernández,et al.  Determinants of Organizational Form: Transaction Costs and Institutions in the European Trucking Industry , 2004 .

[2]  Steven M. Fazzari,et al.  Financing Constraints and Corporate Investment , 1987 .

[3]  G. Phillips,et al.  Capital Structure and Product-Market Rivalry: How Do We Reconcile Theory and Evidence? , 1995 .

[4]  Pol Antras,et al.  Poultry in Motion: A Study of International Trade Finance Practices , 2011, Journal of Political Economy.

[5]  M. Petersen,et al.  Trade Credit: Theories and Evidence , 1996 .

[6]  Marianne Bertrand,et al.  Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985 , 2004 .

[7]  Jayant R. Kale,et al.  Trade Credit, Relationship-Specific Investment, and Product-Market Power , 2011 .

[8]  Steven M. Fazzari,et al.  Working Capital and Fixed Investment: New Evidence on Financing Constraints , 1993 .

[9]  N. V. Horen,et al.  Customer Market Power and the Provision of Trade Credit: Evidence from Eastern Europe and Central Asia , 2007 .

[10]  Luigi Zingales,et al.  Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry , 1997 .

[11]  Gregory F. Udell,et al.  Lending Channels and Financial Shocks: The Case of Small and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis , 2007 .

[12]  T. Hubbard.  Contractual form and market thickness in trucking , 2001 .

[13]  Nirjhar Nigam,et al.  Building legal indexes to explain recovery rates: An analysis of the French and English bankruptcy codes , 2013 .

[14]  Asli Demirgüç-Kunt,et al.  Firms as Financial Intermediaries: Evidence from Trade Credit Data , 2001 .

[15]  Murillo Campello,et al.  Capital Structure and Product Markets Interactions: Evidence from Business Cycles , 2001 .

[16]  Janet Kiholm Smith.  Trade Credit and Informational Asymmetry , 1987 .

[17]  A. Shleifer,et al.  What Do Firms Do with Cash Windfalls? , 1993 .

[18]  Charles J. Hadlock,et al.  New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index , 2009 .

[19]  A. Robb,et al.  An Overview of the Kauffman Firm Survey: Results from 2010 Business Activities , 2012 .

[20]  Vicente Cunat Martinez,et al.  Trade Credit: Suppliers as Debt Collectors and Insurance Providers , 2003 .

[21]  M. Weisbach,et al.  The Cash Flow Sensitivity of Cash , 2003 .

[22]  F. Boissay,et al.  Trade Credit Defaults and Liquidity Provision by Firms , 2007 .

[23]  Douglas Holtz-Eakin,et al.  Sticking it Out: Entrepreneurial Survival and Liquidity Constraints , 1993, Journal of Political Economy.

[24]  Judith A. Chevalier,et al.  Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing , 1995 .

[25]  Gerard Hoberg,et al.  Product Market Threats, Payouts, and Financial Flexibility , 2012 .

[26]  Raymond J. Fisman,et al.  Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships , 2003, Review of Economics and Statistics.

[27]  Emilia Garcia-Appendini,et al.  Firms as liquidity providers: Evidence from the 2007–2008 financial crisis , 2013 .

[28]  Dan Kovenock,et al.  Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions , 1997 .

[29]  C. Fumagalli,et al.  The Deep-Pocket Effect of Internal Capital Markets , 2009 .

[30]  David A. Matsa.  Competition and product quality in the supermarket industry. , 2011, The quarterly journal of economics.

[31]  Leora F. Klapper,et al.  Trade Credit Contracts , 2010 .

[32]  David A. Matsa.  Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry , 2010 .

[33]  Chee K. Ng,et al.  Evidence on the Determinants of Credit Terms Used in Interfirm Trade , 1999 .

[34]  Hyun Song Shin,et al.  Sustaining Production Chains through Financial Linkages , 2012 .

[35]  Owen A. Lamont.  Cash Flow and Investment: Evidence from Internal Capital Markets , 1996 .

[36]  G. Blazenko,et al.  The Product Differentiation Hypothesis for Corporate Trade Credit , 2003 .

[37]  M. Petersen,et al.  Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act , 2012 .

[38]  J. Nilsen,et al.  Trade Credit and the Bank Lending Channel , 2002 .

[39]  Jean Tirole,et al.  Private and Public Supply of Liquidity , 1996, Journal of Political Economy.

[40]  Judith A. Chevalier,et al.  Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry , 1995 .

[41]  C. Ai,et al.  Interaction terms in logit and probit models , 2003 .

[42]  Tore Ellingsen,et al.  What You Sell is What You Lend? Explaining Trade Credit Contracts , 2004 .

[43]  Boyan Jovanovic,et al.  An Estimated Model of Entrepreneurial Choice under Liquidity Constraints , 1989, Journal of Political Economy.

[44]  M. Porter,et al.  From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition , 1977 .

[45]  J. Stiglitz,et al.  Credit Rationing in Markets with Imperfect Information , 1981 .

[46]  Murillo Campello,et al.  Product Market Performance, Switching Costs, and Liquidation Values: The Real Effects of Financial Leverage , 2006 .

[47]  G. Phillips,et al.  Increased debt and industry product markets an empirical analysis , 1995 .

[48]  Lester G Telser,et al.  Cutthroat Competition and the Long Purse , 1966, The Journal of Law and Economics.

[49]  Bruno Biais,et al.  Trade Credit and Credit Rationing , 1997 .

[50]  Naveen Khanna,et al.  Strategic Responses of Incumbents to New Entry: The Effect of Ownership Structure, Capital structure, and focus , 2000 .

[51]  Drew Fudenberg,et al.  Capital as a commitment: Strategic investment to deter mobility , 1983 .

[52]  Lorenzo A. Preve,et al.  Trade Credit and Bank Credit: Evidence from Recent Financial Crises , 2005 .

[53]  T. Hubbard.  The Demand for Monitoring Technologies: The Case of Trucking , 2000 .

[54]  Benjamin S. Wilner.  The Exploitation of Relationships in Financial Distress: The Case of Trade Credit , 2000 .

[55]  Joshua D. Rauh.  Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans , 2006 .

[56]  David S. Evans,et al.  Some Empirical Aspects of Entrepreneurship , 1989 .

[57]  Arup Daripa,et al.  Ensuring Sales: A Theory of Inter-firm Credit , 2011 .

[58]  Laurent Frésard,et al.  Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings , 2009 .

[59]  Tore Ellingsen,et al.  In-Kind Finance: A Theory of Trade Credit , 2004 .

[60]  M. Nadiri.  The Determinants of Trade Credit in the U.S. Total Manufacturing Sector , 1969 .

[61]  Toni M. Whited.  Debt, liquidity constraints, and corporate investment: evidence from panel data , 1992 .

[62]  Kenneth Njoroge,et al.  The Implicit Costs of Trade Credit Borrowing by Large Firms , 2013 .

[63]  F. Boissay,et al.  Payment Defaults and Interfirm Liquidity Provision , 2013 .

[64]  Murray Z. Frank,et al.  Trade Credit, Collateral, and Adverse Selection , 2005 .

[65]  P. Bolton,et al.  A theory of predation based on agency problems in financial contracting , 1990 .

[66]  Simon Gilchrist.  Commercial paper, corporate finance, and the business cycle: a microeconomic perspective , 1995 .

[67]  G. Baker,et al.  Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking , 2000 .

[68]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .