The use of trade credit under extreme conditions: financial distress and financial crisis

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2004

Authors

Preve, Lorenzo A.

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Abstract

I investigate how firms use trade credit under extreme conditions when alternative sources of finance are restricted or even non-existent. My objective in this dissertation is to test the hypothesis that the use of trade credit in extreme financial situations is significantly different from its use in “more normal” situations. The cost associated with a different use of trade credit during distress is likely to increase the costs of financial distress. These costs in turn, are an important determinant of the firm's capital structure, and understanding the use and cost of trade credit under extreme situations will help to better understand the tradeoffs that firms face when making capital structure choices. I consider two different types of extreme conditions; financial distress and financial crises. The manner in which firms operate under the conditions described above provide a laboratory setting for investigating the costs they bear when trying to avoid failure by making incremental recourse to trade credit.

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