The World Bank

This paper studies the effect of financial crises on trade credit in a sub-sample of emerging economies that have experienced financial turmoil during the last decade. We construct a balanced panel of about 530 firms with seven years of data straddling six recent crisis episodes and study the effect of crisis on trade credit provision. We find that although provision of trade credit increases right after the crisis, it consequently collapses in the following months and years. To understand aggregate effects, we analyze firms ’ heterogeneous responses to crisis. We observe that crises have a disproportional effect on trade credit policy of firms with different financial positions. Our results support the “redistribution view ” of trade credit provision, in which bank credit is redistributed via trade credit by the firms with stronger financial position to the firms with weaker financial stand