infonet-economy

Using a sample of firms matched with their suppliers, we study the use of trade credit as firms approach a default event. We show that, in the extensive margin, around one third of suppliers exit the relationship well ahead of default, but the rest continue the relationship. Relationships are more likely to continue when suppliers sell differentiated goods, are located close to their distressed clients, sell large proportions to the distressed clients, or when the distressed client is in a concentrated market, suggesting that dependent suppliers are held up in distressed relationships. Firms with suppliers that continue the relationship continue purchasing the same amounts from their suppliers and have larger increases in accounts payable, suggesting that held-up suppliers trade-off the potential benefits of granting concessions to their clients during bad times with the risk of increasing their exposure to a distressed firm.