Firms as liquidity providers: Evidence from the 2007–2008 financial crisis

TLDR: In this paper, the effect of the 2007-2008 financial crisis on between-firm liquidity provision was studied. But the authors focused on the effect on the trade credit taken by constrained firms.

About: This article is published in Journal of Financial Economics.The article was published on 2013-07-01 and is currently open access. It has received 406 citations till now. The article focuses on the topics: Trade credit & Market liquidity.

Figures

Table 7. Credit constraints and debt in trade credit.

Table 6. Client's debt in trade credit and supplier's liquidity.

Table 5. Supplier's leverage and trade credit provision during the crisis.

Table A.1 Robustness checks on sample, cash measurement, and dependent variable denominator.

Table 1. Descriptive statistics

Table 9. Liquidity provision and firm performance

Frequently asked questions

Q1. What have the authors contributed in "Firms as liquidity providers: evidence from the 2007-2008 financial crisis" ?

Using a supplier-client matched sample, the authors study the effect of the 2007-2008 financial crisis on between-firm liquidity provision. Consistent with a causal effect of a negative shock to bank credit, the authors find that firms with high pre-crisis liquidity levels increased the trade credit extended to other corporations and subsequently experienced better performance as compared to ex-ante cash-poor firms. 

Q2. What is the role of alternative sources of financing in the 2007-2008 financial crisis?

The supply-driven nature of the 2007-2008 financial crisis provides a uniqueopportunity to study the role of alternative sources of financing in compensating for unavailable credit from banks and financial markets. 

Q3. What is the reason why many blame the lack of bank lending?

As the authors emerge from the most severe recession since the Great Depression, manyare blaming the anemic economic recovery to the lack of bank lending. 

Q4. What is the coefficient for cash*crisis for this subset of firms?

The coefficient for cash*crisis for this subset of firms is 0.13 and highly significant, suggesting that liquidity provision enabled redistribution of funds obtained through bond markets to clients more affected by the credit crunch. 

Q5. Why do the authors find that the credit supply of firms is negatively related to accounts receivable?

accounts receivable during the 2007 crisis could grow because clients are not being able to pay their debts to suppliers, rather than because suppliers are providing liquidity to their clients. 

Q6. What is the requirement for a public firm to disclose the identity of its customers?

In accordance with SFAS Nos. 14 and 131, public firms have to disclose the identity of and total amount of sales to customers whose purchases represent more than ten percent of the firm’s total annual sales. 

Q7. What measures of pre-crisis supplier leverage are used to examine the liquidity provision of firms?

Supplier’s debt and trade credit provisionThe authors next extend their analysis and examine liquidity provision during the crisis as afunction of several measures of pre-crisis supplier leverage. 

Q8. What are the reasons why the authors could find their results confounded?

If the first year of the crisis entails an economy-wide demand shock instead of a supply shock as the authors have assumed so far, their inferences could be confounded for two reasons.