What Drives Corporate Trade Credit? The Roles of Financial Distress and Segment Information

This thesis examines the roles of financial distress and segment information disclosure in driving corporate trade credit. Using market-based and accounting-based measures of financial distress, the first empirical study examines whether financially distressed firms rely on trade credit as a source of financing. Using a sample of U.S. public firms throughout 1976-2017, we find that firms increase their use of trade credit when they are in financial distress. This is consistent with the view that suppliers offer trade credit to their distressed customers because they have a better ability to assess their customers' creditworthiness, and monitor and enforce debt repayment in the case of default than traditional financial institutions. The positive relation between financial distress and trade credit is magnified in firms with more information opacity and located in low-trust regions. However, further analyses show that financially distressed firms cannot always rely on trade credit. Overall, our results shed light on how, and when, financially distressed firms rely on trade credit as a source of financing.

Using the adoption of SFAS 131 as a quasi-natural experiment, the second empirical study investigates the impact of segment information disclosure on the use of trade credit. We find that firms that improved their segment disclosure by revealing new information about their segments upon adoption of SFAS 131 decrease their use of trade credit after the adoption of SFAS 131. This is in line with the theoretical prediction that the use of trade credit increases (decreases) when information asymmetry between firms and their capital providers is high (low). Consistent with the improvement in the firm's information environment, such an impact is greater for treatment firms with high default risk, a more opaque information environment, weak governance, and non-Big 4 auditors before SFAS 131. Having access to more sources of financing after the adoption of SFAS 131, these firms rely less on trade credit financing. Further analysis shows that the adoption of SFAS 131 reduces the firm's financial constraints and stock illiquidity, and increases the firm's issuance of equity.