Activity Shocks and Corporate Liquidity: the Role of Trade Credit

Abstract We show both theoretically and empirically how trade credit financing may magnify the impact of activity shocks on corporate liquidity. Using unique daily data on payment defaults on suppliers in France, we quantify the magnitude of the short-term cyclical liquidity stress induced by trade payment obligations, exploiting the COVID-19 crisis as an exogenous shock. A one-standard-deviation rise in net trade credit position increases firms’ default probability by 10% during the lockdown. We find higher impacts for downstream sectors – up to 30% increase in the retail trade – for financially constrained firms, and a contraction in investment. (JEL E32, G32, G33, H12, H32)