When the economy tanks, businesses stop lending to each other, but political drama actually makes them lend more.
Most risks cause firms to hoard cash and tighten credit. However, the study found that political risk leads to a gradual increase in trade credit, suggesting that businesses use inter-firm financing as a strategic tool to navigate long-term political instability rather than retreating from the market.
Political and Non-Political Risk and the Dynamics of Trade Credit
SSRN · 6437642
This paper examines how firms adjust trade credit, a major inter-firm financing margin within supply chains, in response to different types of risk. Using quarterly U.S. firm-level data from 2002Q1 to 2022Q1, I find that overall and non-political risk shocks are followed by immediate short-run contractions in net trade credit, consistent with precautionary liquidity tightening. In contrast, political risk shows no initial contraction; instead, its response builds gradually, turning positive at m