Suppliers as financial intermediaries: Trade credit for undervalued firms

Patrice Fontaine and Sujiao Zhao
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Patrice Fontaine: EUROFIDAI - Institut Européen de données financières - ESSEC Business School - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, PULV - Pôle Universitaire Léonard de Vinci
Sujiao Zhao: Banco de Portugal - Banco de Portugal, UCP Porto - Catholic University of Portugal / Porto - Faculdade de Economia e Gestão & CEGE - Catholic University of Portugal / Porto - Faculdade de Economia e Gestão & CEGE

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Abstract: We examine the impact of undervaluation on a firm's use of trade credit. To address potential endogene- ity bias, we construct our instrumental variable based on mutual fund outflow-driven price pressure, and our undervaluation measure allows us to distinguish misvaluation from fair valuation. We find that a firm's suppliers play an important role in providing temporary bridge financing when the firm is under- valued. The effect varies with the firm's information environment and with its dependence on external finance. In addition, based on a manually matched supplier-customer sample, we show that small cus- tomers in long-term relationships with their suppliers are more likely to obtain trade credit when fac- ing stock market undervaluation, while small suppliers with a smaller customer pool extend more trade credit to their undervalued customers.

Keywords: Undervaluation; Trade credit; Information advantage; Implicit equity stake (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-cfn, nep-cwa and nep-fdg
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Citations: View citations in EconPapers (5)

Published in Journal of Banking and Finance, 2021, 124, pp.106043. ⟨10.1016/j.jbankfin.2021.106043⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03507994

DOI: 10.1016/j.jbankfin.2021.106043

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