Economic Policy Uncertainty and Short-Term Financing: The Case of Trade Credit

54 Pages Posted: 1 Apr 2019 Last revised: 20 Mar 2020

See all articles by Ranjan D'Mello

Ranjan D'Mello

Wayne State University - Department of Finance

Francesca Toscano

Wayne State University - Mike Ilitch School of Business

Date Written: March 21, 2019

Abstract

We examine the impact of policy uncertainty on trade credit. We document a decline (increase) in accounts payable and receivable during periods of high (low) policy uncertainty. The relation is robust and holds after controlling for endogeneity, economic and political uncertainties, and the Great Recession. Additionally, the impact of policy uncertainty on trade credit is long term, affecting short-term borrowing and lending in the following year as well. The reduction in trade credit during periods of high uncertainty is driven by a decrease in supply; firms that are most likely to lend, reduce credit to customers during these periods. There is no evidence that firms with access to alternative sources of funding reduce their borrowings during periods of high policy uncertainty. For the subset of firms that have limited access to external funds, there is an increase in accounts payable in high uncertainty periods suggesting that these firms view trade credit as a substitute source of financing during difficult times. Finally, industry competitiveness impacts the relation; suppliers (customers) in competitive industries have higher (lower) levels of accounts receivable (payable) during high uncertainty periods.

Keywords: Policy Uncertainty, Trade Credits

JEL Classification: G20, G32

Suggested Citation

D'Mello, Ranjan and Toscano, Francesca, Economic Policy Uncertainty and Short-Term Financing: The Case of Trade Credit (March 21, 2019). Available at SSRN: https://ssrn.com/abstract=3358503 or http://dx.doi.org/10.2139/ssrn.3358503

Ranjan D'Mello

Wayne State University - Department of Finance ( email )

328 Prentis Bldg.
5201 Cass Avenue
Detroit, MI 48202
United States
313-577-7828 (Phone)

Francesca Toscano (Contact Author)

Wayne State University - Mike Ilitch School of Business ( email )

2771 Woodward Ave
Detroit, MI 48201
United States

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