Cash Collateral, Creditor Rights, and the Provision of Trade Credit

42 Pages Posted: 19 Apr 2021

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Kayla Freeman

University of Georgia, Terry College of Business, Department of Finance

Janet Gao

Indiana University - Kelley School of Business

Date Written: March 15, 2021

Abstract

U.S. bankruptcy code classifies receivables as cash collateral and provides strong creditor protection over such collateral. We show that strong creditor rights over cash collateral incentivize firms to extend trade credit to customers. We use the staggered adoption of anti-recharacterization laws as shocks enhancing the creditor rights of non-cash collateral, rendering receivables a less attractive collateral choice. Firms incorporated in treated states reduce trade credit provision and borrow less through receivable-backed loans. This effect is not explained by selling receivables to SPVs and is robust to customer-supplier-pair fixed effects. Reduced trade credit leads to reductions in investment and increased borrowing by customers.

Keywords: Cash collateral, trade credit, anti-recharacterization laws, supply chain

JEL Classification: G32, G33, L14

Suggested Citation

Billett, Matthew T. and Freeman, Kayla and Gao, Janet, Cash Collateral, Creditor Rights, and the Provision of Trade Credit (March 15, 2021). Available at SSRN: https://ssrn.com/abstract=3827200 or http://dx.doi.org/10.2139/ssrn.3827200

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Kayla Freeman (Contact Author)

University of Georgia, Terry College of Business, Department of Finance ( email )

Brooks Hall
Athens, GA 30602-6254
United States

HOME PAGE: http://https://sites.google.com/site/kaylafreemanfinance/home

Janet Gao

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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