Abstract
We examine if trade credit helped financially constrained SMEs survive the recent financial crisis. Using data for 202,696 SMEs across 13 European countries over the period 2003-2012, we show that trade credit has a large positive impact on firm survival, especially during the recent financial crisis years, confirming it was an important source of finance for financially constrained SMEs. We also report evidence of a significant redistribution effect, with cash rich or unconstrained firms extending significantly more net trade credit than their less financially resourced counterparts. The results are robust to several econometric concerns.
5 Conclusion
We use a large sample of European SMEs to examine the role of trade credit in financing SMEs over the financial crisis period. The analysis extends the existing literature and empirical evidence on the redistribution theory of Petersen and Rajan (1997), to examine the impact of trade credit on the likelihood of distress and bankruptcy by drawing on models of bankruptcy and financial distress in SMEs (Altman and Sabato, 2007 and Gupta et al., 2015). Prior work (see, e.g., Casey and O’Toole 2014; Carbo-Valverde, et al., 2009 and 2016; GarciaAppendini and Montoriol Garriga, 2013; Ferrando and Mulier, 2013; and Petersen and Rajan, 1997) shows that trade credit provides a buffer for financially constrained firms, and we extend this to show that trade credit significantly reduced the likelihood of financial distress, especially in the aftermath of the 2008 financial crisis.
The increased levels of financing extended by cash rich or unconstrained SMEs over the crisis years played a significant role in funding less liquid and financially constrained SMEs for a period of time, and ultimately, had a positive impact on their survival. In statistical terms, a one standard deviation increase in trade credit leads to a 21% decrease in the likelihood of distress, all else equal. More importantly, we show that trade credit played a more significant role during the post-crisis years, suggesting that it helped many financially constrained firms survive during this period.
