Events calendar

15.00 - 16.30 Friday 3 May 2013

On campus - London - United Kingdom

Accounting Seminar Series

Speaker(s): Anna Costello (MIT)

Responding to the Financial Distress of Trade Partners: The Determinants and Consequences of Trade Financing

In this study, I provide unique evidence on the financing role of trade credit by investigating how trade contract terms change after one party breaches the supply contract. Using a hand-collected dataset of long-term supply contracts and contract renegotiations after breach, I show that the financing theory of trade credit dominates changes in trade credit terms. Specifically, when the contract is breached due to the financial distress of one of the trade partners, the non-defaulting party is more likely to increase the amount and duration of trade financing extended to the defaulter. Further, the non-defaulting party is more likely to provide credit when the defaulter does not have access to bank finance and when the trade parties exchange specialized assets, consistent with the view that trade creditors have an advantage over bank creditors in providing short-term financing. Finally, I show that while the borrower’s investment activity increases after obtaining trade financing, their operating margins decrease. The evidence is consistent with the hold-up problem due to an information advantage, as modeled in Rajan (1992).

Event location

PLG02

Download: ACostello Workshop Paper 03May13.pdf (587.09 KB)
Contact: Debbie Hughes - Email: dhughes@london.edu Tel: +44 (0)20 7000 8120