Cash Collateral, Creditor Rights, and the Provision of Trade Credit
42 Pages Posted: 19 Apr 2021
Date Written: March 15, 2021
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: Suggested Citation