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Trade Finance during the Great Trade Collapse
supply-chain financing: first, whether the firm extended trade credit to its customers; and second, a unique and timely variable of whether the firm increased, maintained, or decreased the volume of goods sold on trade credit during the crisis. Rationales for Trade Finance Previous literature on the extension of trade credit by suppliers to their customers confirms that it is an essential component of external firm financing. The diversity of firms and industries that use supplier credit suggests that no single reason drives its popularity. Rather, its use is motivated by several rationales (Petersen and Rajan 1997; Fabbri and Klapper 2008). First, trade credit extensions may be linked to market power and used as a form of price discrimination, enabling customers to demand better terms from suppliers if they make up a large share of the supplier’s business (Brennan, Maksimovic, and Zechner 1988). Indeed, Klapper, Laeven, and Rajan (2010) show that the largest and most creditworthy buyers receive contracts with the longest maturities from smaller, investment-grade suppliers. Similarly, suppliers in competitive markets are at the mercy of their customers’ market power and may offer attractive trade credit terms to attract new customers and maintain the loyalty of existing ones (Fisman and Raturi 2004; Giannetti, Burkart, and Ellingsen 2008). The extension of trade credit may also serve as a risk management mechanism to reduce informational asymmetries between buyers and sellers, allowing buyers to ensure the quality of the products and sellers to reduce payment risks through two-part payment terms (Ng, Smith, and Smith 1999). In addition, trade credit extensions serve as a substitute for bank credit. Customers are likely to demand trade credit extensions if they face obstacles in obtaining affordable bank credit or believe that their suppliers have cheaper access to financing and a comparative advantage in passing it on (Ng, Smith, and Smith 1999). Empirical research has shown that firms with access to credit from banks or their own suppliers extend a greater amount of credit to their customers (Petersen and Rajan 1997; McMillan and Woodruff 1999; Fabbri and Klapper 2008). The substitution of trade credit for bank credit is particularly relevant in economies with poorly developed financial markets, although empirical evidence on the relationship between trade credit and growth is mixed (Demirgüç-Kunt and Maksimovic 1999; Fisman and Love 2003; Cull, Xu, and Zhu 2009). Data and Summary Statistics The FCS provides unique insight into the use of trade credit during the financial crisis in a representative cross-section of firms in six Eastern European countries.