Trade Credit and Industry Dynamics: Evidence from Trucking Firms

57 Pages Posted: 4 Oct 2013 Last revised: 30 May 2015

Date Written: January 1, 2015

Abstract

Financial strength enhances firms' ability to extend trade credit, which confers a comparative advantage in the product market. To test this idea and its implications, I consider the effect of an exogenous restriction on the trade credit supplied by French trucking firms. In a difference-in-differences setting, I find that trucking firms' corporate default probability drops by one-fourth. The effect is persistent, concentrated among financially constrained firms, and not offset by a drop in profits. The reform also triggers an increase in the entry of small trucking firms, which are as efficient as those set up prior to the reform. Overall, the results indicate that long payment terms are a strong impediment to the entry and survival of constrained firms.

Keywords: Trade credit, investment, default risk, product market competition

Suggested Citation

Barrot, Jean-Noel and Barrot, Jean-Noel, Trade Credit and Industry Dynamics: Evidence from Trucking Firms (January 1, 2015). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2336082 or http://dx.doi.org/10.2139/ssrn.2336082

Jean-Noel Barrot (Contact Author)

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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