Payment Defaults and Interfirm Liquidity Provision
Forthcoming in the Review of Finance
36 Pages Posted: 2 Mar 2007 Last revised: 8 Nov 2012
Date Written: 2012
Abstract
Using a unique data set on French firms, we show that credit constrained firms that face liquidity shocks are more likely to default on their payments to suppliers. Credit constrained firms pass on a sizeable fraction of such shocks to their suppliers. This is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate credit constraints. We show that the chain of defaults stops when it reaches unconstrained firms. Liquidity appears to be allocated from firms with access to outside finance to credit constrained firms along supply chains.
Keywords: credit, credit constraints, credit chains, inter-firm liquidity provision
JEL Classification: D92, G20, G30
Suggested Citation: Suggested Citation
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