Trade Credit Policies and Shortage of Liquidity in Cycles of Economic Contraction

Article Information
Journal: Business and Economics Research Journal
Title of Article: Trade Credit Policies and Shortage of Liquidity in Cycles of Economic Contraction
Author(s): Bahadir Karakoc
Volume: 12
Number: 1
Year: 2021
Page: 127-144
ISSN: 2619-9491
DOI Number: 10.20409/berj.2021.314
Abstract
This study examines the trade credit practices of 11.000 publicly listed firms from 17 countries (9 developed and 8 developing). The results indicate that firms with a lack of short-term liquidity receive more trade credit for a longer duration. It becomes even more pronounced in times of economic contraction. For robustness, both the period of the 2008 financial crisis and a contractionary period are scrutinized. A slowdown in the economy creates opposing effects on firms from developed and developing countries, while the former use less credit for a shorter period; the latter receive more credit for a longer period of time, whereas firms with a shortage of liquidity behave similarly, i.e., they increase the amount and the duration of trade credit. The findings suggest that firms with a lack of liquidity survive troubling times by obtaining more trade credit from their suppliers.

Keywords: Trade Credit, Economic Contraction, Cash Management, Alternative Financing Instruments

JEL Classification: G30, G31, G32

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