Trade Creditors' Information Advantage

by Victoria Ivashina and Benjamin Iverson
 
 

Overview — Trade credit represents about a quarter of the liabilities of US firms. There are several theories explaining this fact. This study reexamines whether suppliers hold private information about their trade partners, by analyzing their behavior in bankruptcy.

Author Abstract

Using information on the sales of debt claims for 132 U.S. Chapter 11 bankruptcy cases, we show that large trade creditors’ decisions to sell receivables of a distressed company in bankruptcy are predictive of lower recovery rates, and that in such cases these creditors sell ahead of less informed suppliers and other creditors. This result is especially pronounced for more opaque distressed firms, when trade creditors’ information advantage is likely largest. This evidence shows that suppliers that extend significant amounts of trade credit hold private information about their trade partners. Trade creditors who are geographically closer or in similar industries tend to lend the most, suggesting that these are two channels through which suppliers hold an information advantage.

Paper Information

  • Full Working Paper Text
  • Working Paper Publication Date: February 2018
  • HBS Working Paper Number: NBER Working Paper Series, No. 24269
  • Faculty Unit(s): Finance