DP11680 | Inter-Enterprise Credit and Adjustment During Financial Crises: The Role of Firm Size

Publication Date

12/03/2016

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

Analyzing a large firm-level database for European countries, the paper shows that during the Great Recession trade credit amplified the liquidity squeeze on SMEs induced by the contraction of bank credit. Because of their generally weaker bargaining power in the inter-enterprise credit market, SMEs sharply increased their net trade credit and thus transferred financial resources to larger firms. The paper finds that the liquidity squeeze induced by trade credit had large negative effects on real activity by SMEs, contributing to the fall in employment, wages and investments.