Trade Credit 1

TRADE CREDIT AND PRODUCT PRICING:
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THE ROLE OF IMPLICIT INTEREST RATES
Niklas Amberg Tor Jacobson

Sveriges Riksbank Sveriges Riksbank
and Stockholm School of Economics
Erik von Schedvin
Sveriges Riksbank
Abstract
We empirically investigate the proposition that firms charge premia on cash prices in transactions
involving trade credit. Using a comprehensive panel data set on product-level transaction prices and
firm characteristics, we relate trade credit issuance to price setting. In a recession characterized by
tightened credit conditions, we find that prices increase significantly more on products sold by firms
issuing more trade credit, in response to higher opportunity costs of liquidity and counterparty risks.
Our results thus demonstrate the importance of trade credit for price setting and show that trade credit
issuance induces a channel through which financial conditions affect prices. (JEL: E31, E32, D22,
G30, L11)
1. Introduction
Does trade credit issuance affect firms’ price-setting behavior? Research on the links
between firm characteristics and price setting has demonstrated that due to capital
The editor in charge of this paper was Claudio Michelacci.

Acknowledgments: We thank the editor, three anonymous referees, Mikael Carlsson, Tore Ellingsen, Isiah
Hull, Stefan Ingves, Simon Kwan, and Greg Udell, as well as seminar and conference participants at the
Federal Reserve Bank of San Francisco, the Swiss Finance Institute at the University of Zürich, Nova School
of Business and Economics in Lisbon, BI Norwegian Business School, the CREDIT 2018 Conference in
Venice, and Sveriges Riksbank for helpful comments and suggestions. This research was partly carried out
while Tor Jacobson was visiting the Reserve Bank of Australia and Erik von Schedvin the Federal Reserve
Bank of San Francisco. We gratefully acknowledge the hospitality extended by these institutions. Niklas
Amberg thanks Jan Wallanders och Tom Hedelius stiftelse Grant No. W2016-0351:1. An earlier version of
this paper was circulated under the title “Trade Credit and Pricing: An Empirical Evaluation”. The opinions
expressed in this article are the sole responsibility of the authors and should not be interpreted as reflecting
the views of Sveriges Riksbank.
E-mail: niklas.amberg@riksbank.se (Amberg); tor.jacobson@riksbank.se (Jacobson);
erik.vonschedvin@riksbank.se (von Schedvin)
Journal of the European Economic Association 2020 00(0):1–32 DOI: 10.1093/jeea/jvaa007

c The Author(s) 2020. Published by Oxford University Press on behalf of European Economic Association. This is an
Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.
org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original
work is properly cited.
2 Journal of the European Economic Association
market imperfections, firms’ leverage and liquidity positions make for important

determinants of movements in price mark-ups over the business cycle (Gottfries 1991;
Chevalier and Scharfstein 1996; Gilchrist et al. 2017). In this paper, we explore an
additional channel at the firm level—the trade credit channel—through which financial
conditions may affect price setting. We posit that product prices in transactions
involving trade credit include a trade credit price premium, the size of which is
determined by the contracted loan maturity and an implicit interest rate, which, in turn,
is a function of the selling firm’s liquidity costs and the buying firm’s default risk. Our
proposition implies that trade credit issuance introduces a countercyclical element into
firms’ price-setting behavior, since increases in liquidity costs and counterparty risks,
which typically accompany recessions and financial crises, cause firms to raise prices.
The widespread use of trade credit in interfirm trade suggests that such fluctuations
in the trade credit price premium could be quantitatively important determinants of
inflation dynamics.1 However, empirical evidence on the effects of trade credit issuance
on price setting is scarce, most likely due to a paucity of firm-level product price data.2
Our aim is to contribute toward a better understanding of trade credit pricing,
and thereby also of product pricing in general, by investigating the prevalence and
determinants of implicit interest rates in trade credit contracts. To this end, we make
use of a rich data set comprising product-level data on prices and quantities for
Swedish manufacturing firms; firm-level accounting data; loan-level data covering
all loans extended by the four major Swedish banks to domestic corporations; firm-
level data on credit ratings from the leading Swedish credit bureau; export data at
the five-digit industry level; as well as data on all applications for the issuance of
injunctions to settle overdue trade credit claims submitted by Swedish corporations
to the Swedish Enforcement Agency. Our empirical strategy is based on exploiting
the 2008–2009 recession in Sweden—which featured severe financial market distress,
as well as a sharp downturn in the real economy—together with the cross-sectional
variation in trade credit maturities that prevailed at the outset of the recession. The
underlying logic of this empirical approach is that a given increase in the implicit
trade credit interest rate is predicted to have a larger impact on product prices
set by firms that issue trade credit with longer maturities. Hence, by exploiting an
aggregate shock to liquidity costs and counterparty risks together with cross-sectional
variation in trade credit maturities, we can test for the presence of a trade credit price
premium, as well as quantify the average change in the implicit trade credit interest
1. In Sweden, 97% of business-to-business transactions involve trade credit (Pärlhem 2016). Jacobson
and von Schedvin (2015) show that the average amount of accounts receivable and payable, scaled by
assets, are 16% and 11% for Swedish firms. Similar reliance on trade credit financing prevails across
countries. For instance, Rajan and Zingales (1995) show that the corresponding numbers for a sample of
US firms are 18% and 15%, whereas Berger and Udell (1998) show that trade credit provides 31% of debt
financing to US SMEs, which is nearly as much as commercial banks.
2. Udell (2015) discusses what he labels “the trade credit pricing puzzle”, and notes that “the ‘all-in’
price—that which matters—must incorporate both the price of the product as well as the financial terms
of trade credit. It is highly unlikely that there are any available data that would allow us to calculate this
all-in price”.
Amberg, Jacobson, and von Schedvin Trade Credit and Product Pricing 3
rate during the recession. Importantly, the richness of our data allows us to carefully

consider the robustness of our results and to validate the plausibility of the identifying
assumptions in several ways, not least by controlling for a large set of potential
confounders.
Our main finding can be summarized as follows. Firms that issued trade credit with
longer maturities, relative to firms that issued shorter maturities, increased their prices
significantly more in the 2008–2009 recession. The annual change in the implicit trade
credit interest rate was 20.9 percentage points higher during the crisis period than in
noncrisis years; in terms of price changes, this implies that a maturity difference of
20 days—approximately equivalent to one standard deviation—is associated with a
relative annual price adjustment of 1.1 percentage points. The magnitude of this effect
can be put into perspective by the following considerations. First, our hypothesis is
that the increase in trade credit interest rates in part reflects a deterioration in financing
conditions and the associated rise in the opportunity cost of liquidity facing sellers,
and in part a rise in default risks and credit risk premia, both of which were substantial
during the crisis (see, e.g., Whited 1992, for the former aspect and Berndt et al. 2018,
for the latter). Second, a reference point is the annualized interest rate in the well-
known “2/10 net 30” two-part terms contract, which is 44.6%.3 Third, another point
of reference is the cost of factoring services, that is, sales of sellers’ invoices to a third
party priced at a discounted nominal invoice value. Factoring discounts in Sweden
are currently in the range of 2%–5%, which in the case of the widely used net-30
contracts—featuring a 30-day credit period and no discount option—corresponds to
implicit annualized interest rates of 24.6%–62.4%.4 Hence, the estimated increase
in implicit trade credit interest rates during the recession is substantial but quite
reasonable when considering the crisis-induced shifts in the underlying determinants
of trade credit interest rates, the implicit interest rates in two-part contracts, and the
costs associated with factoring services.
We also explore the mechanisms underlying the baseline finding that firms issuing
longer trade credit maturities raised product prices more during the crisis. Our
conjecture is that the association between trade credit issuance and price changes
during the crisis is stronger for firms subject to larger increases in liquidity costs and
counterparty risks. We test this using cross-sectional heterogeneity analyses, in which
we estimate the baseline specification on subsamples of firms defined by a set of proxies
for the hypothesized mechanisms. More specifically, we identify firms that experienced
large increases in liquidity costs on the basis of various precrisis firm characteristics,
as well as by exploiting the Baltic crisis and its effects on Swedish banks as a quasi-
experiment. For increases in counterparty risk, we use, first, a set of industry-level
measures of buyer risk calculated using input–output tables; and second, seller-level
measures constructed using data on applications for the issuance of injunctions to
3. “2/10 net 30” contracts stipulate that the buyer must pay within 30 days, whereas offering a discount
of 2% for payments made within ten days. This implies that buyers are charged an implicit annualized
interest rate of 44.6% when they do not avail themselves of the discount offer.
4. Only a small fraction, around 3%, of Swedish firms use factoring services (Pärlhem 2016).
enforce late trade credit payments. The results of the cross-sectional heterogeneity

analyses show that the impact of trade credit issuance on prices indeed is observed
primarily for firms that faced larger increases in liquidity costs and counterparty
risks, respectively, which provides support for our conjecture about the underlying
mechanisms.
This paper makes two key contributions. First, our findings contribute to the trade
credit literature by advancing the understanding of how trade credit is priced. The
existing literature on the pricing of trade credit is largely divided between two opposing
views. The most commonly held is that trade credit is an expensive funding source,
since the discount structure in two-part contracts, in which buyers are offered discounts
for early payments, imply very high interest rates for buyers that choose to forgo the
discount (see, e.g., Smith 1987; Petersen and Rajan 1997; Klapper, Laeven, and Rajan
2012). However, most trade credit is issued under net terms contracts, in which no
discounts are offered, nor are explicit interest rates specified; hence, the discount
structure in two-part contracts does not establish that trade credit is expensive in
general.5 Instead, the predominance of net terms contracts has led others to draw the
opposite conclusion, namely, that trade credit is typically supplied at zero interest (see,
e.g., Daripa and Nilsen 2011). The absence of explicit interest rates does not imply
that trade credit issued under net terms is free, however, since sellers may incorporate
implicit interest rates in their product prices, as outlined and argued in this paper.
Several papers, including Cuñat (2007) and Giannetti, Burkart, and Ellingsen (2011),
have noted this possibility, but the available empirical evidence is scant. In sum, given
that the vast majority of trade credit is issued under net terms, and that there exists
little empirical evidence on the pricing of net terms contracts, the question of how
trade credit is priced remains an open issue.6
Current evidence on the effect of trade credit issuance on product prices comes
from two papers studying trade finance, that is, the financing of international trade
transactions. Antràs and Foley (2015) study financing terms in international trade
using transaction-level data from a large US exporter of food products. They show
that the exporter charges higher product prices in trade credit transactions than in
5. For US firms, Ng, Smith, and Smith (1999) find that 25.5% of the firms in a sample drawn from
Compustat mainly offer two-part contracts, whereas Giannetti, Burkart, and Ellingsen (2011), using the
1998 National Survey of Small Business Finances, document that firms on average are offered early
payments discounts from 21.3% of their suppliers. Moreover, Giannetti et al. find that only 7.8% of firms
operate in industries in which discounts are common. Using more recent data from 2005, Klapper, Laeven,
and Rajan (2012) find that 13% of the contracts extended to a sample of large US and European buyers
included early payment discounts. In Sweden, the dominance of net terms contracts over two-part contracts
appears to be even larger. For example, Ellingsen, Jacobson, and von Schedvin (2016) find no evidence
of the use of two-part contracts in a sample comprising over 50 million trade credit contracts issued by
a sample of Swedish suppliers. Moreover, there is no mention of early payments discounts in either of
two recent inquiries on trade credit payment terms commissioned by the Swedish government (Bengtsson
2007; Pärlhem 2016).
6. Note that the argument that product prices may include implicit interest rates also has implications
for two-part contracts—the credit extended during the initial period of a two-part contract is commonly
viewed as a zero-cost loan, but this credit could also be priced through an implicit interest rate.
cash transactions when buyers are located in countries with weak enforcement of

contracts. In contemporaneous work, Garcia-Marin, Justel, and Schmidt-Eisenlohr
(2018) study trade credit extension in international trade using transaction-level data
covering the exports of Chilean manufacturers. Like Antràs and Foley (2015), they
find that product prices are higher in transactions involving trade credit and that
premia are particularly high for exports to countries characterized by weak contract
enforcement. These papers thus suggest that sellers price counterparty risk when
extending trade credit, which is consistent with the results in this paper. We extend
the findings in Antràs and Foley (2015) and Garcia-Marin, Justel, and Schmidt-
Eisenlohr (2018) in several ways. First, we show that trade credit price premia feature
prominently in interfirm trade in general, rather than being particular to international
trade transactions. Second, we provide evidence indicating that the implicit interest
rates in trade credit contracts are determined not only by counterparty risk, but also by
sellers’ liquidity costs, and hence that trade credit issuance induces a channel through
which financial market conditions affect prices. Third, we document that shifts in
liquidity costs and counterparty risks cause the trade credit price premium to vary over
time.
We also contribute to the macroeconomic literature on financial conditions and
product pricing. One strand of this literature has proposed the existence of a cost
channel of monetary policy, according to which hikes in nominal interest rates brought
on by contractionary monetary policy generate cost-push inflation by increasing firms’
working capital costs (e.g., Christiano and Eichenbaum 1992; Christiano, Eichenbaum,
and Evans 1997; Ravenna and Walsh 2006). Barth and Ramey (2001), among others,
provide aggregate empirical evidence in support of the cost channel of monetary
policy, whereas Gaiotti and Secchi (2006) document similar effects using firm-level
data on prices and interest rates for a sample of Italian manufacturing firms. More
recently, Christiano, Eichenbaum, and Trabandt (2015) show, on the basis of an
estimated New Keynesian model, that the increase in credit spreads that occurred
during the financial crisis of 2008–2009 dampened deflationary pressures through
the cost channel. Our paper adds to this literature in two ways: first, we provide
new microeconometric evidence on the effects of financial market distress on prices
through the cost channel; second, our empirical framework allows us to separately
assess the effects of the two main components of working capital, namely, accounts
receivable and inventories. Finally, our paper is also consistent with and complementary
to the strand of this literature that shows that liquidity constraints, in the presence of
customer markets, constitute an important determinant of movements in price mark-
ups over the business cycle (Gottfries 1991; Chevalier and Scharfstein 1996; Gilchrist
et al. 2017).
The rest of the paper is organized as follows. The next section describes the
2008–2009 recession in Sweden, details our data resources, and provides descriptive
statistics. Section 3 presents a conceptual framework that outlines the link between
trade credit and product pricing, and describes the empirical approach by which we
take its predictions to the data. Sections 4 and 5 present the results of the empirical
analysis. Section 6 concludes.
2. Institutional Background and Data

2.1. The 2008–2009 Recession in Sweden
The 2008–2009 recession in Sweden is well-suited for testing the hypothesis that
product prices include a trade credit premium, since it featured a sharp downturn in
the real economy as well as severe distress in the banking sector, both of which were
caused by external shocks hitting the Swedish economy in the wake of the global
financial crisis.
The banking sector distress had two main causes. The first was the collapse of
international financial markets following the outbreak of the global financial crisis.
Although Swedish banks had little direct exposure to asset-backed securities issued
in the United States, they are highly dependent on external wholesale funding and
are therefore sensitive to funding conditions in international financial markets, which
deteriorated rapidly after the onset of the crisis. The second cause was the severe
economic crisis in the Baltic countries, which two of Sweden’s four major banks were
highly exposed to as a result of having expanded in the Baltic market in the years prior
to the crisis. These two shocks led to elevated distress in the financial system, although
observers’ judgments differ somewhat as to the severity of the distress. According to the
IMF’s banking crisis database, for example, Sweden suffered a “borderline” systemic
banking crisis beginning in 2008 (Laeven and Valencia 2012), whereas Romer and
Romer (2017), using a financial distress measure ranging from 0 to 15, classifies the
level of distress in Sweden during 2008–2009 as 5 on average, with a peak value of 7.
The banking sector distress quickly led to a deterioration in the credit conditions
facing corporate borrowers: beginning in 2008 and continuing throughout 2009,
growth in bank lending to firms fell steadily (Finansinspektionen 2012), and many
firms reported on a worsening access to external finance (Konjunkturinstitutet 2009;
Sveriges Riksbank 2009). Meanwhile, the real economy fell into a sharp recession,
with a decline in real GDP of around 6% in 2009, partly due to the domestic banking
sector distress and partly due to the breakdown in international trade that occurred
during this period (see, e.g., Levchenko et al. 2010), which affected the export-oriented
Swedish economy badly. The recession did thus not only impair firms’ cash flows and
their access to external finance—and thereby their liquidity positions—but also led to
increased counterparty risks, not least manifested in a near-doubling of the aggregate
bankruptcy rate. Moreover, it is conceivable that corporate credit risk premia increased
even more dramatically than the bankruptcy rate. Berndt et al. (2018), for example,
document that risk premia for public firms in the United States—measured as the
difference between a firm’s credit default swap rate and its expected default loss rate—
peaked in the financial crisis of 2008–2009, when the cost for credit insurance per unit
of expected loss increased by a factor 10 on average.
2.2. Data and Variable Definitions
The empirical analysis is based on data from four sources, which we merge
unambiguously by means of the unique identifier (organisationsnummer) attached
to each Swedish firm. First, we obtain data on prices and quantities from “Industrins

varuproduktion”, an annual survey conducted by Statistics Sweden comprising all
manufacturing plants with at least 20 employees, as well as a sample of smaller plants.
The data cover transaction prices and quantities of goods sold at the product-plant level
(products are classified using 8/9-digit CN codes).7 Thus, for each product produced
at a given plant, we observe the average transaction price (as opposed to the list price),
as well as the quantity of goods sold in each year. We aggregate the price and quantity
data to the firm-product level using the sales value for each product and plant as
weights.
Second, we obtain firm-level accounting data from the database Serrano, which
covers the universe of corporations in Sweden. Serrano is constructed based on data
from several official sources, most importantly the Swedish Companies Registrations
Office, to which all Swedish corporations are required to submit annual financial
accounting statements in accordance with EU standards. Third, we use a loan-level
database available at Sveriges Riksbank, which covers all loans and credit lines
extended by the four major Swedish banks to Swedish corporations. Fourth, we obtain
data on firm-level default probabilities from the credit bureau UC AB. Finally, we
use data on applications for the issuance of injunctions to enforce late trade credit
payments, submitted by sellers to the Swedish Enforcement Agency
Our primary outcome variable is the firm-product inflation rate, defined as the log
change in the average transaction price charged by firm i for product p between years
t 1 and t
i;p;t D ln Pi;p;t ln Pi;p;t1 :
The data contain several observations of very large price changes, which likely reflect
measurement error, for example, in the form of unobserved changes in product quality;
we truncate the inflation rate variable at the 5th and 95th percentiles to reduce the
risk that such observations influence our results. Moreover, around 3,000 observations
belong to firm-product groups for which we only have one observation and are therefore
redundant in specifications with firm-product fixed effects, which are all but one in
this paper. Excluding these singleton observations leaves us with 45,953 firm-product
inflation rate observations, corresponding to 3,408 firms and 3,319 unique products,
over the sample period 2004–2011.
The main explanatory variable concerns firms’ trade credit maturities. For want
of contract-level data and the exact maturity in each trade credit contract, we follow
standard practice in the literature and use the ratio of accounts receivable to sales
Rec 07
Oi07 D i
:
Sales07
i
7. These data have previously been used by Carlsson and Skans (2012). To give an idea of the granularity
of the product classification, we can, for example, compare the codes 84212100 and 84212200, which refer
to “machinery and apparatus for filtering or purifying water” and “machinery and apparatus for filtering
or purifying beverages (excl. water)”, respectively.
Oi07 is thus a proxy for firm i’s average trade credit maturity, measured in years, across

all its products and buyers in 2007.8
We include two sets of control variables. The first set of controls, Xi;p;t , consists
of two variables at the firm-product level: the log change in the quantity of sales
of product p by firm i between years t 1 and t, Qi, p, t ; and a proxy for the
change in unit input costs for product p produced by firm i between years t 1
and t, UICi;p;t , where unit input costs are defined as the sum of labor costs and
intermediate input costs divided by physical output.9 The second set of controls, Zi;t1 ,
comprises the following firm-level variables: cash and liquid assets, Cash=Assetsi;t1 ;
bank loans, Bank debt=Assetsi;t1 ; asset tangibility, Tangible assets=Assetsi;t1 ;
cash flow, EBITDA=Assetsi;t1 ; inventories, Inventories=Salesi;t1 ; and firm size,
ln Assetsi;t1 . Explanatory variables are winsorized at the 1st and 99th percentiles—
that is, observations above the 99th percentile are assigned the value of the observation
at the 99th percentile, and correspondingly for observations below the 1st percentile—
to reduce the influence of outliers.
2.3. Sample and Descriptive Statistics
Table 1 reports descriptive statistics for all variables used in the empirical analysis.
The mean (median) firm-product inflation rate, reported in panel A, is 2.9% (0.7%).
The average value of Oi07 , reported in panel B, is 0.097, which corresponds to a trade
credit contract maturity of 35 days. Average cash holdings amount to 8.3% of total
assets, whereas the average size of the unused part of firms’ credit lines is 4.3% of total
assets. Panel C shows the values of the time-varying firm characteristics. The average
firm has a book value of assets of 319 million SEK and sales of 390 million SEK
(roughly 49 and 60 million USD, respectively, at the exchange rate prevailing at the
end of 2007). The sample thus consists primarily of medium-sized and large firms. In
Figure 1, we show that our sample is representative of the broader economy in terms of
price changes. More specifically, the figure shows that the average annual firm-product
8. A firm’s accounts receivable is the sum of all claims held by the firm on its customers for goods and
services that have been delivered but not paid. Hence, it measures the total amount of trade credit extended
by a firm to all of its customers at a given point in time. By dividing accounts receivable by sales, one
obtains a proxy for the average maturity of the trade credit issued by a given firm, measured in years. More
precisely, Oi07 measures average time to payment, which may differ from contracted payment time due
to either late or premature payments. Note that value-added tax (VAT) is included in accounts receivable
as reported on firms’ balance sheets, but not in the sales figures on the profit-and-loss statements. Hence,
the amount of receivables observed for a given firm-year observation needs to be divided by one plus the
applicable VAT rate for Oi07 to capture the true average maturity (the standard VAT rate in Sweden is 25%,
but for a few of the industries in our sample, a lower VAT rate of 12% applies).
9. We do not observe labor costs and intermediate input costs at the product level, so we must resort to the
following approximation when calculating UICi;p;t . For each plant and year, we portion out plant-level
labor costs and intermediate input costs across the products produced at the plant in proportion to the plant-
level sales share of each product. We then compute the plant-product level values of UICi;p;t . Finally, we
aggregate UIC i;p;t to the firm-product level using total sales for each product-plant as weights.
TABLE 1. Descriptive statistics.

Mean Median SD Pct. 25 Pct. 75 No. obs.
A. Price and quantity variables (2004–2011)

Firm-product inflation rate ( i, p, t ) 0.029 0.007 0.159 0.031 0.093 45,953
Change in quantity sold (Qi, p, t ) 0.007 0.005 0.442 0.147 0.154 45,953
Change in unit input costs (UICi, p, t ) 0.033 0.024 0.261 0.080 0.147 45,953
B. Time-invariant firm characteristics (2007)
Trade credit maturity (Oi07 ) 0.097 0.095 0.056 0.064 0.124 3,408
Inventories/Sales07
i
0.142 0.124 0.110 0.069 0.189 3,408
Export share07j.i/
0.299 0.251 0.232 0.086 0.433 3,408
Cash/Assets07
i
0.083 0.024 0.127 0.002 0.112 3,408
Unused LC/Assets07 i
0.043 0.003 0.070 0.000 0.062 3,408
CustPDc(i) 0.708 0.651 0.134 0.628 0.749 3,408
Salesc(i) 0.070 0.047 0.103 0.125 0.008 3,408
SalesIc.i/
V
0.042 0.057 0.037 0.072 0.002 3,408
SumInji 0.115 0.000 0.744 0.000 0.000 3,408
NoInji 0.110 0.000 0.715 0.000 0.000 3,408
C. Time-varying firm characteristics (2004–2011)
Trade credit maturity (Oi;t ) 0.090 0.090 0.048 0.060 0.117 18,025
Cash=Assetsi, t 0.081 0.022 0.124 0.002 0.111 18,025
Bank debt=Assetsi, t 0.126 0.028 0.164 0.000 0.232 18,025
Tangible assets=Assetsi, t 0.269 0.248 0.183 0.116 0.392 18,025
Cash flow=Assetsi, t 0.125 0.122 0.131 0.057 0.198 18,025
Inventories=Salesi, t 0.148 0.128 0.105 0.078 0.194 18,025
Assetsi, t (in SEK 1,000) 318,984 58,994 1,018,467 26,518 164,564 18,025
Salesi, t (in SEK 1,000) 390,197 101,013 1,003,049 45,561 258,046 18,025
Notes: This table reports descriptive statistics for all variables used in the empirical analysis, as well as for
some additional firm characteristics. Each firm appears only once in panel B and only once per year in panel C,
irrespective of how many products it sells and thus how many firm-product observations it has in a given year.
Definitions of the variables are provided in the text.
inflation rates in our sample track the changes in the aggregate producer price index
for the goods-producing sector of the economy quite closely over the sample period.
In Figure 2, finally, we document an important feature of trade credit maturities
that will help inform our conceptual framework and empirical approach, namely,
that maturities are persistent over time. More specifically, the figure plots average
trade credit maturities, as measured by Oi;t , for firms above and below the sample
medians of Oi;t and Oi07 , respectively. Average trade credit maturities are very stable
over the period 2004–2011 for both above- and below-median firms when using the
yearly classification, whereas above-median firms, as classified based on Oi07 , reduced
maturities slightly during the crisis, with Oi;t falling from 0.129 to 0.112.
3. Conceptual Framework and Empirical Approach
3.1. Conceptual Framework
In standard formulations of the firm’s price-setting problem, the optimal price for
product p sold by firm i, Pi, p , is equal to the product of the firm’s marginal cost for
.05

.04
.03
π
.02
.01
0
2004 2005 2006 2007 2008 2009 2010 2011
Sample firms Aggregate economy
F IGURE 1. Price changes in sample and in the aggregate economy. The solid line shows the average
annual firm-product inflation rate in our sample and the dashed line the annual change in the
aggregate producer price index for the entire goods-producing economy (SNI/NACE sections A– E).
We calculate the latter as the log change in the annual average of the monthly values of the producer
price index. Source: Statistics Sweden and authors’ calculations.
.08 .16
.12
τ
.04
0
2004 2005 2006 2007 2008 2009 2010 2011
Above median (fixed) Above median (yearly)

Below median (yearly) Below median (fixed)
F IGURE 2. Average trade credit maturities over time. The figure shows average trade credit
maturities, as measured by Oi;t , for firms above and below the sample medians of Oi;t and Oi07 ,
respectively, over the period 2004–2011. The solid and short-dashed lines show average maturities
when the classification of firms is done on a year-by-year basis (Oi;t ), and the long-dashed and
dashed-dotted lines when the classification is done based on the trade credit maturity distribution in
2007 (Oi07 ).
producing p, MCi, p , and a mark-up, i, p , that depends on the firm’s price-setting power

in the product market:
Pi;p D i;p M Ci;p : (1)
This characterization of the price-setting problem neglects one salient aspect, however,
namely that interfirm transactions ever so often involve trade credit.
Since lending is associated with costs—most importantly due to funding and to
credit risk exposure—prices charged in trade credit transactions likely surpass prices
charged in cash transactions. Schwartz (1974) highlights this trade credit feature of
price setting and suggests that firms add a trade credit premium to the cash price,
determined by the contracted loan maturity and an implicit interest rate, in transactions
involving trade credit. Our conceptual framework rests on the relationship proposed
by Schwartz and we focus on its implications for the link between firms’ trade credit
issuance and pricing decisions.
C
To formalize, let Pi;p denote the cash price, corresponding to the price in
T T
equation (1), and let Pi;p denote the trade credit price. Pi;p can then be expressed
as a function of the cash price, the maturity, and an implicit interest rate:
T
Pi;p C
D Pi;p e ri;p i;p ; (2)
where ri, p is the implicit annual interest rate charged by the seller and i, p is the
maturity of the trade credit contract, in number of net days divided by 365. The
interest rate and maturity may well vary across transactions; the parameters ri, p and
i, p should therefore be interpreted as averages across all sales of product p by firm i.
From equations (1) and (2), we can derive the firm-product inflation rate:
T T T
i;p;t D ln Pi;p;t ln Pi;p;t1

D ln i;p;t C ln M Ci;p;t C ri;p;t i;p;t

D ln i;p;t C ln M Ci;p;t C i;p;t1 ri;p;t C ri;p;t1 i;p;t : (3)
Equation (3) highlights two important features of the relationship between trade
credit maturities and product prices. First, a change in the implicit trade credit interest
rate has a larger impact on T for sellers that issue trade credit with longer maturities, as
captured by the term i, p, t1 ri, p, t . Second, the strength of the relationship between
implicit trade credit interest rates and T depends on the extent to which sellers adjust
trade credit maturities in response to shifts in liquidity costs and counterparty risk,
which is reflected in the term ri, p, t1 i, p, t . Hence, if sellers, for example, decrease
maturities in trade credit contracts in response to increases in their liquidity costs, the
relationship between r and T would be attenuated, since the direct effect of the
change in r on T would then be partly offset by the decrease in . As documented
previously, however, variation in trade credit maturities over time is on average small,
which implies that an empirically reasonable approximation is that 0. The model
that we take to the data is therefore the following:
T
i;p;t D ln i;p;t C ln M Ci;p;t C i;p ri;p;t ; (4)
in which the firm-product inflation rate in year t is determined by the change in the

mark-up, the change in marginal cost, and the product of the average trade credit
maturity and the change in the implicit interest rate, all of which are allowed to vary
at the firm-product level.
In line with Schwartz (1974), our hypothesis is that the trade credit interest rate,
r, is determined by two factors: (i) the seller’s cost of liquidity and (ii) the risk of the
buyer’s default in the transaction.10 That is, the implicit interest rate in product prices
is increasing in sellers’ liquidity costs and credit risk exposures, all else equal. The
cost of liquidity that applies to the issuance of trade credit is given by the opportunity
cost of the marginal unit of liquidity facing a firm—the shadow cost of liquidity—
and is thus equal to the external funding cost for financially unconstrained firms, but
higher than this for firms that experience binding liquidity constraints due to external
finance rationing (Whited 1992). Regarding counterparty risks, the Bankruptcy Code
in Sweden provides trade credit debt with junior priority status, which means that
sellers have little hope of recovering claims on failed buyers’ bankruptcy estates
after prioritized holders of claims have been handled (Thorburn 2000).11 Hence, trade
credit lending is associated with substantial credit risk (see Jacobson and von Schedvin
(2015), for further empirical evidence on this).
3.2. Baseline Specification
To test the hypothesis outlined in the previous section, we apply the following empirical
specification:
i;p;t D ˇ Crisist Oi07 C ˛i;p C ˛t C Xi;p;t C ı Zi;t1 C "i;p;t ; (5)
where i, p,t is the firm-product inflation rate; Crisist is a dummy variable equal to one
in the years 2008 and 2009 and zero otherwise; Oi07 is the average trade credit maturity
for firm i in 2007; ˛ i, p and ˛ t are firm-product and year fixed effects, respectively; and
Xi;p;t and Zi;t1 are the vectors of control variables defined in Section 2.2. We fix the
maturity variable to each firm’s last precrisis value to mitigate endogeneity concerns,
but we show in what follows that our baseline result is virtually unchanged if we instead
use a time-varying measure of maturities, which reflects the considerable persistence
in Oi;t documented previously. The firm-product fixed effects control for potential
10. Antitrust legislation may to some extent limit firms from engaging in price discrimination. Similarly
to the US setting, EU Competition Law (Article 82(c) of the EC Treaty) dictates what Swedish firms
can and cannot do in terms of setting differential prices across buyers, and under what circumstances.
Whereas it is true that firms cannot fully customize prices—although Article 82(c) has quite strict and
precise requirements for making a case of price discrimination—free pricing is not a prerequisite for our
analysis, neither conceptually, nor empirically. Indeed, the average interest rate and maturity parameters
in equation (2) are consistent with firms setting standardized prices equal for all their buyers on the basis
of the opportunity costs of liquidity they face and the average counterparty risks in the pool of buyers they
service.
11. This treatment of trade creditors in bankruptcy proceedings is similar to international practice (see
Cuñat and Garcia-Appendini 2012 for an overview).
time-invariant differences in price setting between firms with low and high trade credit

issuance, respectively, whereas the vector Xi;p;t controls for fluctuations in demand
and production costs at the firm-product level. The vector Zi;t1 , finally, controls for
additional time-varying firm characteristics that may influence price setting. Standard
errors are clustered at the firm level in all regressions. We estimate the baseline
specification for the period 2004–2011, which comprises a four-year precrisis period
(2004–2007), the crisis period itself (2008–2009), and a two-year post-crisis period
(2010–2011).
The parameter of interest is ˇ, which captures the difference between crisis and
noncrisis years in the extent to which trade credit maturities affected firm-product
inflation rates. In particular, on the basis of equation (4) and its embedded assumption
of persistence over time in , ˇO provides an estimate of the difference in r between
crisis and noncrisis years. Our empirical approach is thus based on the aggregate
shocks to liquidity costs and counterparty risk arising in the 2008–2009 recession in
Sweden, in combination with the cross-sectional variation in trade credit maturities
that prevailed at the outset of this period.12 The underlying idea is twofold. First, as
noted previously, the 2008–2009 recession in Sweden featured general and widespread
increases in liquidity costs and counterparty risks, which, according to the hypothesis
outlined in the previous section, should lead to upward shifts in implicit trade credit
interest rates, ri, p . The crisis dummy is thus a proxy that captures the fact that changes
in the underlying determinants of ri, p were higher in crisis years than in noncrisis
years. Second, an increase in ri, p of a given size will have a greater impact on product
prices set by firms that issue trade credit with longer maturities, in accordance with
equation (4). Hence, within this framework we can test if product prices include a
trade credit price premium by comparing firm-product inflation rates across crisis
and noncrisis years, respectively, for firms that issue trade credit with long and short
maturities.
3.3. Potential Threats to Identification
The identifying assumption underlying the empirical specification detailed in the

previous section is that there are no omitted variables correlated with the interaction
term Crisist Oi07 that affect firm-product inflation rates, conditional on controls. This
implies that a potential omitted variable needs to fulfill two conditions to be of concern:
it has to be correlated with Oi07 and its effect on firm-product inflation rates must vary
between crisis and noncrisis years. Now, since our identifying variation is given by the
cross-sectional differences in trade credit maturities that prevailed at the outset of the
crisis, Oi07 , and not by variation stemming from an exogenous shock, it is important
to probe the sources of the variation in maturities. To this end, we compare firms
12. In exploiting an aggregate shock combined with cross-sectional variation in firms’ exposure to the
shock, our empirical set-up is similar to those used in several papers in the previous literature on the financial
crisis of 2008–2009, such as Duchin, Ozbas, and Sensoy (2010), Garcia-Appendini and Montoriol-Garriga
(2013), and Gilchrist et al. (2017).
TABLE 2. Covariate balance in the sample.

A. High Oi07 B. Low Oi07 C. Covariate balance measures
Mean SD Mean SD h l h=` h:95 `:95
Cash/Assets07
i
0.076 0.112 0.091 0.141 0.110 0.235 0.938 0.991
Bank debt/Assets07 i
0.146 0.165 0.111 0.159 0.217 0.038 0.976 0.971
Tangible assets/Assets07
i
0.235 0.174 0.270 0.195 0.190 0.116 0.912 0.974
Cash flow/Assets07 i
0.139 0.127 0.145 0.149 0.043 0.160 0.914 0.974
07
Inventories/Salesi 0.150 0.109 0.134 0.111 0.141 0.023 0.906 0.974
ln.Assets07
i
/ 10.947 1.281 11.166 1.585 0.153 0.213 0.877 0.983
Export share07j.i/
0.305 0.229 0.293 0.234 0.052 0.019 0.950 0.966
Unused LC/Assets07 i
0.047 0.071 0.039 0.068 0.115 0.045 0.977 0.974
CustPDc(i) 0.707 0.134 0.710 0.133 0.021 0.012 0.964 0.890
Salesc(i) 0.083 0.100 0.056 0.105 0.264 0.048 0.856 0.955
SumInji 0.121 0.740 0.108 0.748 0.018 0.011 1.000 1.000
NoInji 0.119 0.705 0.100 0.725 0.027 0.029 1.000 1.000
No. firms 1,752 1,656
Notes: This table reports descriptive statistics for firms with average trade credit maturities, Oi07 , above and below
the sample median (panels A and B), as well as four measures of covariate balance proposed by Imbens and
Rubin (2015) (panel C). The set of covariates comprises all firm-level control variables, measured in 2007, as
well as all sample-split variables used in the empirical analysis. h ` denotes a normalized difference and is
q
calculated as .XN h XN ` /= .Sh2 C S`2 /=2, where XN is the mean, S is the standard deviation, and subindices h and
` denote firms with trade credit maturities above and below the sample median, respectively. h=` is the log of
the ratio of the standard deviations for above-median and below-median firms. Finally, h:95 measures the share
of below-median firms for which the value of a given variable lies in the 95% central range of the distribution of
the same variable for above-median firms (and vice versa for `:95 ).
with average trade credit maturities above and below the sample median, respectively,
on all firm-level covariates used in the empirical analysis, measured in 2007. The
comparison is conducted on the basis of four measures of covariate balance proposed
by Imbens and Rubin (2015): normalized differences in means, logs of the ratios
of standard deviations, and two measures of coverage frequency. The results of this
comparison, presented in Table 2, show that firms issuing trade credit with long and
short maturities are similar across the entire set of covariates under consideration.13
This is consistent with the findings in the previous literature, which has struggled to
provide unambiguous evidence regarding the determinants of variation in trade credit
maturities across sellers (see Ellingsen, Jacobson, and von Schedvin 2016 for empirical
evidence and a review of the literature).
We assess potential threats to the identifying assumption in the following ways.
First, we estimate the baseline specification augmented with, in turn, product-year
fixed effects and industry-year fixed effects, which means that we effectively compare
firms with high and low trade credit issuance selling the same product, or operating
13. To see this, note that the largest normalized difference is 0.26 in absolute terms, whereas the lowest
coverage frequency is 0.86. As a comparison, Imbens and Rubin (2015), in an evaluation of the experimental
LaLonde (1986) data set, observe a maximum normalized difference of 0.30 and a minimum coverage
frequency of 0.91, which they judge to be excellent covariate balance.
.05

.04
.03
π
.02
.01
0
2004 2005 2006 2007 2008 2009 2010 2011
High τ in t−1 Low τ in t−1
F IGURE 3. Average firm-product inflation rates over time. The figure shows average firm-product
inflation rates in each year of the sample period for firms above (solid line) and below (dashed line)
the median of the trade credit maturity distribution in year t 1, Oi;t1 .
in the same industry, in a given year. These specifications thus address threats from
the set of potentially confounding factors suggested by theories that posit that trade
credit maturities are determined by product- or industry-specific factors (e.g., Lee and
Stowe 1993; Long, Malitz, and Ravid 1993; Kim and Shin 2012; Kalemli-Özcan et al.
2014). Second, we estimate the baseline specification augmented with interactions
between the crisis variable and specific potential confounders that can vary within
product and industry clusters, and which are therefore not absorbed by product-year
or industry-year fixed effects. Third, we address an alternative explanation for why
trade credit issuance and prices may be positively related during periods of tight credit.
Suppose that demand increases for goods sold by firms issuing trade credit with longer
maturities as a consequence of trade credit becoming more valuable for buyers when
other sources of financing dry up. Increased demand could then push up the prices
set by these firms relative to the prices of firms that provide short maturities. To
distinguish between the demand- and supply-side explanations, we estimate a version
of the baseline specification with changes in the quantities of goods sold replacing
changes in prices as outcome variable; if the explanation based on demand is correct,
we should observe an increase in both prices and quantities for goods sold by firms
that issue long trade credit maturities, whereas we would observe higher prices, but
lower or unchanged quantities if the effects are supply-driven.
4. Main Results
We begin the presentation of our empirical findings with a graphical illustration of

our main result. Figure 3 shows average firm-product inflation rates over the period
2004–2011 for firms with average trade credit maturities above (solid line) and below
(dashed line) the sample median in year t 1. Inflation rates for the two groups of firms

track each other closely in the four years leading up to the 2008–2009 recession, but
then differ markedly during the crisis: although the average inflation rate falls in both
groups of firms—which is what one would expect in a crisis period with deflationary
pressures—it falls considerably less among firms that issue long trade credit maturities.
In the post-crisis period, the inflation rates in the two groups of firms begin to follow
each other more closely again. Figure 3 thus provides illustrative evidence for our
hypothesis that increases in liquidity costs and counterparty risk lead firms to raise
trade credit premia and thereby product prices. In what follows, we formalize this
result by means of the empirical strategy outlined in the previous section.
4.1. Baseline Results and Robustness Checks
Table 3 reports results for various estimations of the model specified in equation (5).
We quantify the magnitude of the coefficients for the main explanatory variable, the
interaction term Crisist Oi07 , in two ways. First, we report the coefficients themselves,
which, as noted previously, capture the difference in r between crisis and noncrisis
years. Second, we calculate what the coefficients imply in terms of the difference in
annual firm-product inflation rates between firms that issue long and short trade credit
maturities by multiplying the coefficient with the difference in Oi07 between firms
located at the 75th and 25th percentiles, respectively, of the Oi07 -distribution.14
The baseline result is reported in column (1). The coefficient on the interaction
term Crisist Oi07 is positive and statistically significant, which suggests that firm-
product inflation rates are increasing in trade credit maturities in the crisis period.
The magnitude of the coefficient shows that r on average was 20.9 percentage
points higher during the crisis than in noncrisis years.15 This estimate implies that
the difference in annual firm-product inflation rates between firms that issue long and
short trade credit maturities was 1.3 percentage points higher in crisis years than in
noncrisis years.
Next, we re-estimate the baseline specification using weights that adjust for
differences in the shares of each firm’s total sales accounted for by each of its
products. More specifically, we estimate a weighted regression where the weight
for each observation, ! i, p, t , is calculated as firm i’s sales of product p divided by
firm i’s total sales. Hence, we effectively estimate the baseline regression at the firm
level instead of at the firm-product level. The results are reported in column (2). The
coefficient on the interaction term Crisist Oi07 implies a difference in r of 15.4
14. The difference between the 75th and the 25th percentiles of the Oi07 -distribution is 0.060, which
corresponds to a difference in trade credit maturity of around 22 days. Throughout the rest of this section,
we refer to firms located at the 75th and 25th percentiles of the trade credit maturity distribution as firms
that issue long and short trade credit maturities, respectively.
15. We obtain virtually the same point estimate, 0.211 (3.4), when we estimate the baseline specification
with lagged, time-varying trade credit maturities, Oi;t1 , instead of the time-invariant explanatory variable,
Oi07 .
TABLE 3. Baseline results.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
C
i, p, t i, p, t i, p, t i;p;t i, p, t i, p, t i, p, t i, p, t i, p, t Qi, p, t
Crisist Oi07 0.209 0.154 0.415 0.232 0.125 0.182 0.214 0.230 0.008
(3.4) (3.2) (2.4) (3.9) (2.5) (3.4) (3.6) (3.8) ( 0.1)
Crisist Oi07 ; High 0.018
(2.8)
j
Crisist Export share07 0.046
(3.4)
i
Crisist Inventories/Sales07 0.083
(2.9)
High versus low Oi07 0.013 0.009 — 0.025 0.014 0.008 0.011 0.013 0.014 0.000
Firmproduct FE Yes Yes Yes Yes Yes No Yes Yes Yes Yes
Productyear and firm FE No No No No No Yes No No No No
Industryyear FE No No No No No No Yes No No No
Firm- and product-level controls Yes Yes Yes Yes No Yes Yes Yes Yes Yes
Weights No Yes No No No No No No No No
R2 0.429 0.420 0.429 0.319 0.214 0.590 0.458 0.430 0.429 0.306
No. firms 3,408 3,408 3,408 3,408 3,408 3,174 3,401 3,408 3,408 3,408
No. observations 45,953 45,953 45,953 45,953 45,953 35,971 45,921 45,953 45,953 45,953
Notes: This table reports results for estimations of various specifications based on equation (5). The dependent variable is the firm-product inflation rate, i, p, t , in all specifications
except those in column (4), where it is a dummy equal to one for price increases and zero otherwise, and in column (7), in which it is the change in the quantity of goods sold,
Amberg, Jacobson, and von Schedvin Trade Credit and Product Pricing
Qi, p, t . The regression in column (2) is estimated using WLS, where the weight for each observation, ! i, p, t , is calculated as firm i’s sales of product p divided by firm i’s total
sales in year t. The product fixed effects are based on 8/9-digit CN codes and the industry fixed effects on three-digit SNI/NACE codes. All regressions include year fixed effects
except that in column (7), in which they are redundant. High versus low Oi07 is calculated as the estimated difference in the dependent variable between firms located at the 75th
and 25th percentiles of the Oi07 -distribution. The estimation period is 2004–2011 in all columns. t-statistics calculated using robust standard errors clustered at the firm-level are
reported in parentheses. Significant at 5%; Significant at 1%.
17

percentage points and a difference in the annual firm-product inflation rate between

firms that issue long and short trade credit maturities of 0.9 percentage points, which
is slightly lower than in the previous specification. This suggests that sellers with more
diversified product portfolios tend to make slightly larger price adjustments on average.
Although we winsorize all variables used in the estimations to reduce the influence
of outliers, one may still be concerned that a small number of firms with very long trade
credit maturities could influence the results unduly. We therefore estimate a version of
the baseline specification in which the main explanatory variable is a dummy indicating
whether a firm’s trade credit maturity was above or below the sample median in the last
precrisis year. The results, reported in column (3), show that the difference in inflation
rates between firms above and below the sample median of the trade credit maturity
distribution was 1.8 percentage points higher in crisis years, which is consistent with
the baseline result. Similarly, one may be concerned that a small number of very large
price adjustments drive the baseline result. To address this, we estimate a version of
the baseline specification in which the dependent variable is replaced by a dummy that
takes the value one for price increases, and zero otherwise. The coefficient, reported in
column (4), implies that the relative propensity of firms that issue long and short trade
credit maturities to increase prices was 2.5 percentage points higher in crisis years.
These findings suggest that outliers are not a concern for the baseline result.
4.2. Accounting for Alternative Explanations
In the remainder of this section we assess the plausibility of several alternative

explanations for our results, by means of variations on the baseline specification. We
begin by considering a bivariate regression specification, in which we drop all firm-
and product-level control variables except the firm-product and year fixed effects.
The purpose is to examine how the inclusion of the control variables in the vectors
Xi;p;t and Zi;t1 affect the baseline estimate, which is helpful for assessing the extent
to which unobservables may confound our findings. The results of this exercise are
reported in column (5) of Table 3. The point estimate (t-statistic) for the coefficient
of interest is 0.232 (3.9), which is very close to the baseline coefficient, whereas R2
drops from 0.429 to 0.214. This indicates that although the firm- and product-level
control variables add substantial explanatory power to the regression, their effect on
the coefficient of interest is small, which is what one would expect given the similarity
of firms that issue high and low trade credit maturities.
Next, the baseline specification includes firm-product fixed effects to control for
time-invariant differences in inflation rates across products. Hypothetically, time-
varying differences in inflation rates across products could be important: supposing that
inflation rates during the crisis were higher for certain products, for reasons unrelated
to trade credit issuance, and that the same products are customarily sold with long
trade credit maturities, then our baseline result could be spurious. To address this
possibility, we estimate a specification in which we replace the firm-product fixed
effects with firm fixed effects and product-year fixed effects to control for the part of
the variation in the inflation rate that is common to all producers of a given product. The
resulting coefficient, reported in column (6), is positive and statistically significant, but

its magnitude is only around three-fifths of the magnitude of the baseline coefficient,
which suggests that our baseline result is partly associated with time-varying product-
specific factors. Note, however, that the sample size falls by more than 20% in this
estimation. This reduction occurs because many products are produced by only one
firm in a given year and we can only make use of observations belonging to product-
year cells with at least two observations in a specification with product-year fixed
effects. Hence, the decline in effect magnitude—from 0.209 to 0.125—could be due
to some combination of the change in sample composition and the introduction of
product-year fixed effects. To test for the sample composition effect, we re-estimate
the baseline specification on the subsample comprising observations belonging to
product-year cells with at least two observations. This yields a coefficient estimate of
0.168 (3.4), which indicates that one half of the decline in the estimated coefficient can
be attributed to the sample composition effect and the other half to the introduction of
product-year fixed effects.
On a related note, we assess whether time-varying differences in inflation rates
across industries could affect our results. We do this by estimating the baseline
specification augmented with industry-year fixed effects, where industries are defined
using two-digit SNI/NACE codes. The coefficient on the interaction term Crisist Oi07 ,
reported in column (7), implies a difference in r of 18.2 percentage points and in the
annual firm-product inflation rate between firms that issue long and short trade credit
maturities of 1.1 percentage points.
The collapse of world trade that occurred during the global financial crisis had a
large adverse impact on Sweden, a small open economy in which exports account for
almost half of GDP. This could potentially influence our results, since (i) international
trade typically is associated with longer trade credit maturities and (ii) exporting
firms faced a substantial drop in demand during the crisis. We control for the potential
influence of export demand by augmenting the baseline specification with an interaction
term between the crisis dummy and a variable measuring the precrisis export share of
total sales at the five-digit industry level, Export share07
j . The results of this estimation,
reported in column (8), show that the coefficient on trade credit maturities is virtually
unchanged compared with the baseline specification, whereas the coefficient on the
export share is negative and statistically significant, which is what one would expect
given the large decline in export demand during the crisis.
Next, some theories of trade credit predict that accounts receivable are negatively
correlated with inventory holdings (see, e.g., Bougheas, Mateut, and Mizen 2009). Such
a correlation could give rise to bias in our baseline estimates, if the size of a firm’s
inventory holdings has a direct impact on its price setting during economic downturns.
To examine this possibility, we estimate a version of the baseline specification in
which the ratio of precrisis inventories to sales interacted with the crisis dummy is
included as a control variable. The results of this estimation are reported in column (9).
The coefficient for trade credit maturity is slightly larger than the baseline estimate,
whereas the coefficient for inventories is negative and statistically significant, which
suggests that firms that entered the crisis with high inventory holdings attempted to
reduce these through price cuts. The different signs of the estimated effects of trade

credit and inventories indicate that the mechanism that we document in this paper is
specific to trade credit provisioning, and not merely an instance of a more general
working capital channel.
Finally, another conceivable alternative explanation for our baseline finding is that
it reflects a shift in demand during the crisis—away from sellers that issue short trade
credit maturities and toward sellers that issue long maturities—as a result of longer
trade credit maturities becoming more valuable for liquidity-constrained buyers during
crises. To evaluate the demand-shift explanation, we regress the change in the quantity
of sold goods, Qi, p, t , on the right-hand side of the baseline specification. The idea
is that an upward shift in demand for goods sold by firms that issue long trade credit
maturities should cause an increase in both prices and quantities. column (10) shows,
however, that the coefficient in this specification is negative and insignificant, which
speaks against the alternative explanation based on shifts in demand.
5. Mechanisms
In this section we propose to scrutinize the underlying mechanisms for the baseline
finding that firms issuing longer trade credit maturities tended to raise product prices
more during the crisis. Thus, we conjecture—in accordance with the hypothesis
outlined in the conceptual framework—that the association between trade credit
issuance and price changes is stronger for firms subject to larger increases in liquidity
costs and counterparty risk. To this end, we conduct cross-sectional heterogeneity
analyses, in which we estimate the baseline specification on subsamples of firms
defined by proxies for changes in liquidity costs and counterparty risk during the
crisis. The proxies we use capture firm characteristics obtaining in the crisis and we
therefore restrict the sample period to 2006–2009 throughout this section.
5.1. The Liquidity-Cost Mechanism
We use two approaches to identify firms that experienced particularly large increases in
liquidity costs during the crisis. First, we follow a common practice in the literature and
identify firms based on precrisis characteristics that are likely to have been important
determinants of their liquidity costs during the crisis. Second, we use the Baltic crisis
and its detrimental effect on two Swedish banks as a quasi-experiment along the lines
of Chodorow-Reich (2014).
5.1.1. Results Based on Precrisis Characteristics. We consider two measures of

firms’ precrisis liquidity positions as sources of heterogeneity in liquidity costs across
sellers during the crisis: cash and liquid assets, Cash=Assets07
i;t1 ; and the size of unused
07
credit lines, Unused LC/Assetsi;t1 . For each variable, we construct two subsamples:
one with the firms in the bottom three deciles and one with the firms in the top
three deciles, the former of which corresponds to firms experiencing large increases

in liquidity costs during the crisis, and the latter to firms for which this increase
was smaller.16 The presumption underlying this exercise is that firms with weaker
precrisis liquidity positions were more vulnerable to deteriorations in cash flow and
access to external finance during the crisis, and therefore subject to larger increases
in liquidity costs (see, e.g., Duchin, Ozbas, and Sensoy 2010; Gilchrist et al. 2017).
Hence, we should observe a stronger relationship between trade credit maturities and
price changes during the crisis in the group of vulnerable firms.
The results of the exercises based on firms’ precrisis liquidity positions are reported
in panel A of Table 4. column (1) covers results for the sample splits based on the
Cash=Assets07 i;t1 distribution. The coefficient is large and statistically significant for
firms with low precrisis cash holdings, but small and statistically insignificant for
firms with high precrisis cash holdings; the difference is statistically significant at
the 1% level in a one-sided test. A similar pattern emerges in column (3), where we
report the results for subsamples of firms with credit lines in the bottom and top of
the Unused LC/Assets07 i;t1 distribution: the coefficient is large and significant in the
former group, but smaller and insignificant in the latter; the difference is in this case
statistically significant at the 10% level. These results thus support the notion that
increases in liquidity costs partly account for the baseline relationship between trade
credit issuance and price changes.
5.1.2. The Baltic Crisis as a Quasi-Experiment: Empirical Setup. In search of a

possibly more exogenous source of variation in liquidity costs, we now turn to the
Baltic crisis and its effect on Swedish banks’ corporate lending, following the empirical
approach of Chodorow-Reich (2014). The idea is that bank–firm relationships are
sticky, and that variation in loan supply across banks therefore gives rise to variation
in access to external finance across firms.17 In our context, this implies that the cross-
sectional variation in bank health caused by the Baltic crisis gave rise to variation
in liquidity costs across Swedish nonfinancial firms. Hence, by splitting our sample
based on which bank served each firm as its main lender at the outset of the crisis,
we obtain subsamples consisting of firms for which the increase in liquidity costs
during the crisis was larger and smaller, respectively. In what follows, we describe the
relevant features of the Baltic crisis in more detail and explain how we exploit it as a
quasi-experiment.18
16. We only observe lending from the four major Swedish banks and will therefore underestimate
Unused LC/Assets07
i;t1
for firms obtaining credit from minor banks. This will, if anything, lead us to
underestimate the difference between the two subsamples.
17. This empirical approach has subsequently been employed in several other studies, for example, Huber
(2018), Bentolila, Jansen, and Jiménez (2018), and Berton et al. (2018).
18. For more comprehensive overviews of the Baltic crisis, see the European Commission (2010) and
Hansson and Randveer (2013). A more thorough description of the Swedish financial system is provided
by Sveriges Riksbank (2015). Bryant, Henderson, and Becker (2012), finally, provide a detailed analysis
of the Swedish experience during the global financial crisis.
TABLE 4. Mechanism I—Liquidity cost pass-through.

(1) (2)
Cash/Assets07
i Unused LC/Assets07
i
Panel A. Precrisis balance-sheet measures

Crisist Oi07 1fTi T 70th g 0.024 0.081
(0.2) (0.7)
Crisist Oi07 1fTi T 30th g 0.508 0.307
(4.3) (3.3)
p-value for difference 0.005 0.070
R2 0.246 0.262
No. firms in top/bottom deciles 770/783 799/1,001
No. observations 12,248 13,436
(1) (2) (3)

All firms Single-bank Single-bank
firms firms, not with D
Panel B. The Baltic crisis experiment

Crisist Oi07 1fTi D 0g 0.210 0.192 0.172
(2.1) (1.7) (1.3)
Crisist Oi07 1fTi D 1g 0.398 0.492 0.492
(2.3) (3.4) (3.4)
p-value for difference 0.171 0.049 0.049
R2 0.518 0.528 0.526
No. control/treated firms 1,321/643 1,003/551 748/551
No. observations 16,574 11,668 10,003
Notes: This table reports results for estimations of equation (5) on various subsamples of firms for the period
2006–2009. Column (1) in panel A reports results for estimations on subsamples consisting of firms in the top three
and bottom three deciles, respectively, of the Cash=Assets07i;t 1
distribution, whereas column (2) reports results
for a corresponding sample-split based on the Unused LC/Assets07 i;t 1
distribution. The cutoffs used to construct
the subsamples are defined at the firm level; hence, the number of firms in each subsample is approximately
the same, whereas the number of observations differ somewhat (note, though, that the number of firms differs
somewhat in the split based on credit lines due to the fact that more than 30% of firms have no unused credit
line). Columns (1)–(3) in panel B concern estimations of equation (5) on treated firms and control firms in the
Baltic crisis experiment. The samples underlying the estimations in the three columns comprise all firms with
a precrisis bank relationship (column 1); all single-bank firms (column 2); and single-bank firms except those
with bank D as their main lender (column 3). Reported p-values correspond to one-sided tests, where the null
hypothesis is that the estimates of ˇ are equal in each pair and the alternative hypothesis that the coefficients are
larger for firms in the bottom deciles (panel A) and in the treatment group (Panel B). t-statistics calculated using
robust standard errors clustered at the firm-level are reported in parentheses. Significant at 10%; significant
at 5%; significant at 1%.
The Swedish bank market is dominated by four major banks, which we refer to as
banks A, B, C, and D. These four banks operate countrywide and lend to households
and firms in all sectors of the Swedish economy; at the time of the crisis, they accounted
for about 85% of banking sector assets and 75% of corporate lending. Prior to the global
financial crisis, all of these banks had entered the Baltic market, but the scale of their
Baltic operations differed greatly, with two banks (C and D) having substantial shares
of their loan portfolios allocated to the Baltic market, whereas the other two had only
minor (bank B) or even negligible (bank A) shares of their lending there. The Baltic

countries subsequently suffered among the deepest recessions in the world during the
crisis, which led to large losses for banks operating in the region. The impact of the
crisis differed substantially across Swedish banks, causing large losses for banks C and
D, whereas leaving banks A and B more or less unharmed. This quickly led financial
market participants to revise their assessments of the two exposed banks, which put
immediate pressure on their funding situations. Panels (a) and (b) of Figure 4 show
CDS spreads and stock prices, respectively, for the four major Swedish banks between
2007 and 2010; whereas CDS spreads increased and stock prices fell for all banks
during the crisis, they did so more drastically for banks C and D. There is widespread
agreement that these differences are accounted for by the banks’ differential exposures
to the Baltic countries (see, e.g., Ingves 2010; Bryant, Henderson, and Becker 2012;
IMF 2012).
Swedish authorities responded by swiftly implementing several crisis measures
intended to mitigate the impact of the crisis on the banking sector. The most important
response was the introduction of a guarantee program that offered full government
insurance for all new debt issued by banks that chose to opt into the program. To
participate in the program and receive the insurance, a bank had to pay a fee—
amounting to 50 basis points for debt with maturities less than a year, and the bank’s
average precrisis CDS spread plus 50 basis points for debt with longer maturities—as
well as adhere to certain conditions, for example, that no bonuses could be paid out to
senior management while the bank participated in the program. The design and scope
of the program implied that participating banks could borrow cheaply during the crisis,
since the precrisis CDS spreads were low for all banks and the government insurance
made lending virtually risk-free for creditors.
In the end, however, only the bank most affected by the Baltic crisis (bank D)
chose to participate, which meant that it was only the second-most affected bank (bank
C) that saw its actual funding costs rise sharply during the crisis. As Chodorow-Reich
(2014) and others point out, adverse shocks to bank health primarily reduce credit
supply by increasing banks’ funding costs; hence, the Baltic crisis only affected bank
C in the sense that we are interested in here.19 One would thus expect bank C to have
reduced lending more than the other banks during the crisis. In panel (c) of Figure 4,
we show that this is precisely what happened. This suggests that borrowers of bank
C on average faced a contraction in loan supply relative to borrowers of banks A, B,
and D.
We exploit the Baltic crisis as a quasi-experiment by assigning firms whose main
precrisis lender was bank C to a treatment group and firms whose main lender was
19. The choices of banks C and D about whether or not to participate in the guarantee program were
of course deliberate decisions on the parts of the banks’ leaderships, rather than random outcomes. This
is, however, only problematic for our analysis to the extent that these choices were dictated by the
characteristics of the banks’ Swedish corporate borrowers. Although there is no consensus on what the
determinants of the banks’ choices were, it is unlikely that differences in customer characteristics was one,
as there is little sorting between firms and banks in the corporate segment of the Swedish bank market.
(a) CDS spreads

350
A
300 B
C
250 D
CDS (basis points)

200
150
100
50
0
Mar−07
Jun−07
Sep−07
Dec−07
Mar−08
Jun−08
Sep−08
Dec−08
Mar−09
Jun−09
Sep−09
Dec−09
Mar−10
Jun−10
Sep−10
Dec−10
(b) Stock prices
125
A
100
Stock price (2006Q4=100)
75 B
50
D
C
25
0
Mar−07
Jun−07
Sep−07
Dec−07
Mar−08
Jun−08
Sep−08
Dec−08
Mar−09
Jun−09
Sep−09
Dec−09
Mar−10
Jun−10
Sep−10
Dec−10
(c) Lending to Swedish non−financial firms

115
110
Loan volume (2007Q4=100)
105
100
95
90
C A/B/D A/B
85
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
F IGURE 4. Swedish banks and the Baltic crisis. The figure shows five-year senior unsecured CDS
spreads (panel (a)); stock prices (panel (b)); and the total volume of outstanding loans to Swedish
nonfinancial firms (panel (c)) for the four major Swedish banks between 2007 and 2010. The dashed
line in panel (c) shows the joint loan volumes of banks A, B, and D, and the dashed-dotted line the
joint loan volumes of banks A and B. Sources: Thomson Reuters and Statistics Sweden.
bank A, B, or D to a control group.20 In this setting we can test the hypothesis that

the relationship between trade credit maturities and price changes during the crisis is
stronger for firms in the treatment group, that is, for firms who saw their access to
external finance decline more during the crisis.
5.1.3. The Baltic Crisis as a Quasi-Experiment: Results. The results for the Baltic
crisis quasi-experiment are presented in panel B of Table 4. The first row shows the
estimated coefficients for control firms (Ti D 0) and the second row the coefficients for
treated firms (Ti D 1). Consider first column (1), in which we present the results of the
estimation of the specification just described, in which the treatment group consists of
all firms whose precrisis main lender was bank C and the control group of all firms
whose main lender was bank A, B, or D. The results show that the coefficient of interest
is more than twice as large for treated firms as for control firms, but the difference
between the two subsamples is despite this not statistically significant. Hence, these
results provide some support for our conjecture, but the evidence is not conclusive.
Note, however, that although all treated firms had bank C as their main lender at
the outset of the crisis, some of them had active relationships with other banks as well,
and could therefore likely offset some part of the contraction in lending on the part of
bank C by increasing borrowing from their other banks. If so, some firms that were not
in fact affected by the negative loan supply shock would be included in the treatment
group, which would weaken the test. We therefore consider an alternative specification,
in which we drop all multiple-bank firms from the treatment group as well as from
the control group (the latter to avoid introducing differences in the characteristics of
treated firms and control firms). The results in column (2) show that the difference in
the estimated coefficients becomes even larger, 0.492 versus 0.192, when we consider
single-bank firms only; moreover, the difference is now statistically significant at the
5% level.
Finally, although bank D participated in the guarantee program and thereby largely
avoided the effects of the crisis on its funding costs, it is still possible that its lending
behavior was affected by the crisis. We therefore consider a specification that is
equivalent to that in column (2), except that the control group only includes firms whose
main precrisis lender was bank A or B. The results of this alternative specification,
reported in column (3), are, however, very similar to the results in column (2); hence,
whether or not borrowers of bank D are included in the control group matters little
for the results. In sum, the results of the analysis based on the Baltic crisis lends
further support to the claim that increases in liquidity costs is a mechanism underlying
the positive relationship between trade credit issuance and price changes during
the crisis.
20. Most firms have only one bank relationship at any given point in time and the main lender is then
simply the bank with which the firm has a relationship. For firms with multiple bank relationships, the
main lender is defined as the bank with the largest amount of lending to the firm at the outset of the crisis.
Firms with no banking relationships at all are excluded from the analysis.
5.2. The Counterparty-Risk Mechanism

We turn next to the evidence for the counterparty-risk mechanism. For want of
data at the level of buyer–seller pairs—which would allow us to the estimate the
relationship between buyer risk and product prices directly, while controlling for seller
characteristics using seller fixed effects—we rely on the following proxies for the
change in counterparty risk facing each seller during the crisis: first, a set of industry-
level measures of buyer risk calculated using input–output tables; and second, seller-
level measures constructed using data on applications for the issuance of injunctions
to enforce late trade credit payments, submitted by sellers to the Swedish Enforcement
Agency.
5.2.1. Results Using Industry-Level Measures of Counterparty Risk. We use two

main industry-level measures of changes in counterparty risk during the crisis, one
based on changes in the average default probability (PD) of firms in buyer industries,
CustPDc.i / , and the other based on changes in sales in buyer industries, Salesc.i / .
Although the former is a direct measure of shifts in counterparty risk, the latter is
a broader measure intended to capture risk shifts induced by weakening demand
during the crisis. CustPDc.i / is constructed as follows: first, we calculate the sales-
weighted average default probability for each two-digit SNI/NACE industry and year;
we then compute the change in each industry’s weighted average PD between 2007
and 2009; finally, we use the 2008-vintage of Statistics Sweden’s input–output tables
to calculate the industry-level measure of changes in average buyer PDs facing
firms in each industry. Based on CustPDc.i / , we then construct two subsamples:
one comprising firms in the top three deciles and one firms in the bottom three
deciles, respectively. The former consists of firms that faced a larger increase in
counterparty risk during the crisis, and the latter of firms for which this increase was
smaller.
Our second industry-level measure, Salesc.i / , is constructed by first computing
the change in sales between 2007 and 2009 at the two-digit industry level, and then
using the input–output table to convert the industry sales changes to a measure
of sales growth at the level of buyer industries. We then construct subsamples by
assigning firms for which Salesc.i / is less than or equal to zero to one group,
and firms for which it is positive to another; the former consists of firms with
larger and the latter of firms with smaller increases in counterparty risk during the
crisis.
The results for the sample splits based on the main industry-level measures of
counterparty risk are reported in columns (1) and (2) of Table 5. In both cases, the
estimated coefficient is large and statistically significant in the subsample of firms that
faced larger increases in counterparty risk during the crisis, but small and statistically
insignificant in the group of firms for which the risk increase was lower; the difference
between the coefficients estimated for the two subsamples within each pair is, moreover,
statistically significant in both cases. These findings thus support the conjecture that
TABLE 5. Mechanism II—Counterparty risk pass-through.

(1) (2) (3) (4) (5)
CustPDc.i/ Salesc.i/ SalesIc.i/
V
SumInji NoInji
Crisist Oi07 1fTi 0.393 0.367 0.218 0.210

High
D 0g 0.016
(0.1) (4.5) (4.3) (2.7) (2.7)
Crisist Oi07 1fTi 0.515 0.429 0.547
High
D 1g 0.011 0.029
(3.4) (0.1) (0.2) (2.1) (2.4)
p-value for difference 0.004 0.005 0.020 0.168 0.083
R2 0.285 0.257 0.255 0.250 0.250
No. firms 887/792 1,980/663 2,090/553 2,300/343 2,316/327
No. observations 21,091 21,091 21,091 21,091 21,091
This table reports results for estimations of equation (5) on various subsamples of firms for the period 2006–2009.
More specifically, the different columns report results for sample splits based on the change in buyer PDs (column
1); the change in sales in buyer industries (column 2); the change in sales in buyer industries instrumented
using the precrisis export share of each industry (column 3); the change in the sum of the claims underlying
the injunctions issued on behalf of each seller (column 4); and the change in the number of injunctions issued
on behalf of each seller (column 5). The changes are from 2007 to 2009 in all cases. In column (1), TiHigh is
equal to zero for firms in the bottom three deciles of the CustPDj.c/ distribution, and to one for firms in the
top three deciles. In remaining columns, TiHigh is equal to zero if Ti 0 and equal to one if Ti > 0. Reported
p-values correspond to one-sided tests, where the null hypothesis is that the estimates of ˇ are equal in each pair
and the alternative hypothesis that the coefficients are larger for firms with TiHigh D 1 in columns (1), (4), and
(5), and for firms with TiHigh D 0 in columns (2) and (3). The number of firms refer to the numbers of firms for
which TiHigh D 0 and TiHigh D 1, respectively. t-statistics calculated using robust standard errors clustered at the
firm-level are reported in parentheses. Significant at 5%; significant at 1%.
increases in counterparty risk contribute to the positive relationship between trade

credit issuance and price changes during the crisis.
The analysis so far is based on ex post measures that in principle could be subject
to reverse causality. To address this concern, we employ a precrisis instrument for the
change in counterparty risk during the crisis, which allows us to construct a sample
split based exclusively on ex ante variables. More specifically, we use the precrisis
export share of sales for each industry as an instrument for Salesc.i / , since an
important cause of the downturn in the Swedish economy during the crisis was the
decline in export demand generated by the collapse in international trade. Indeed, an
industry-level regression of the log change in sales between 2007 and 2009 on the
export share of sales in 2007 yields a point estimate (t-statistic) of 0.345 (–3.7) and
an F-statistic of 13.4, which shows that precrisis export share is a strong predictor
for sales growth during the crisis. We therefore construct an alternative sales growth
measure, SalesIV c.i / , in which we substitute the predicted values from the regression of
sales growth on precrisis export share for actual sales growth during the crisis. We then
run this measure through the input–output table and construct subsamples in precisely
the same way as for the original sales growth measure.
The results when estimating equation (5) on the subsamples defined by the
distribution of SalesIV c.i / are presented in column (3) of Table 5. They are very similar
to the results for the original sales growth measure: the coefficient is again large and
statistically significant for the group of firms that faced larger increases in counterparty
risk, but small and statistically insignificant in the group of firms for which the increase

was lower, whereas the difference between the estimated coefficients is statistically
significant.
5.2.2. Results Using Data on Injunctions Issued by the EA. The analysis in the
previous section relies on industry-level measures of counterparty risk, which by
construction are crude approximations for the true changes in risk facing individual
firms. We will therefore next consider a seller-level measure of risk, constructed using
data provided by the Swedish Enforcement Agency (EA), the government agency
tasked with coordinating the administrative process of bankruptcy resolution. One of
the responsibilities of the EA is to provide legal support to sellers for the management
of their unsettled trade credit claims. More specifically, a seller who holds an overdue
trade credit claim on a customer can request the EA to issue an injunction against the
customer; if the request is approved, the EA will notify the debtor for payment within
a fortnight and take further measures to enforce payment should the debtor persist in
dishonoring the claim. The data we have obtained from the EA consists of the complete
record of injunctions issued by the EA in response to applications submitted by the
universe of Swedish corporate firms from 2007 and onward. Hence, for each seller in
our sample, we observe all injunctions that were issued on its behalf in a given year,
as well as the sum of the claims they concern. The data on injunctions issued by the
EA thus allow us to identify sellers whose buyers are in financial trouble and who
therefore constitute particularly large credit risks. Hence, by computing the change in
the number of injunctions issued on behalf of a given seller between 2007 and 2009—or,
analogously, the change in the sum of the claims underlying the same injunctions—we
can identify sellers who faced particularly large increases in counterparty risk during
the crisis.21
The analysis based on the injunction data is structured as follows. For each seller,
we compute the change in the sum of the claims underlying the injunctions issued on
its behalf between 2007 and 2009, SumInji . We do this using the symmetric growth
rate formula, since the number of applications submitted in 2007 is zero for almost all
sellers in the sample.22 We then split the sample into two groups—one consisting of
firms with a growth rate strictly larger than zero and the other of firms for which the
growth rate is less than or equal to zero—and test the hypothesis that the relationship
between trade credit maturities and price changes during the crisis is stronger for firms
in the former group, that is, for sellers who faced a greater increase in counterparty
risk. We also conduct an analogous exercise based on the change in the number of
injunctions issued on behalf of each seller between 2007 and 2009, NoInji .
The results of the exercises based on SumInji and NoInji are reported in
columns (4) and (5), respectively, of Table 5. The findings are similar across the two
21. Applying for injunctions to settlement is normally the creditor’s last resort and typically occurs when
claims have been overdue for extended periods—several weeks, or longer.
22. For sellers with no application in either 2007 or 2009, the symmetric growth rate is not defined. We
assign a growth rate of zero to these firms.
specifications: the estimated coefficients are statistically significant in both groups of

firms, but are considerably larger for the groups of firms that faced larger increases
in counterparty risk. The difference between the coefficients is not significant for
SumInji , whereas we obtain a p-value of 0.081 in the case of NoInji . The exercises
based on the injunction data thus provide further support for the conjecture that
increases in counterparty risk is one mechanism underlying the baseline result.
6. Conclusions
Schwartz (1974) proposes that product prices include a trade credit price premium,
determined by the contracted loan maturity and an implicit interest rate, which, in turn,
is a function of the selling firm’s liquidity costs and the buying firm’s default risk.
This implies that changes in liquidity costs and counterparty risks cause changes in
product prices, and thus that trade credit issuance introduces a countercyclical element
into firms’ price-setting behavior. We test this proposition empirically using Swedish
manufacturing firm data and the 2008–2009 recession as a shock to liquidity costs and
counterparty risks.
Our analysis confirms that price adjustments are positively related to trade credit
issuance during the crisis: our baseline estimate indicates that the annual change
in the implicit trade credit interest rate was 20.9 percentage points higher during
the crisis period than in noncrisis years, which implies that a maturity difference of
20 days is associated with a relative annual price adjustment of 1.3 percentage points.
By exploring the mechanisms underlying the baseline result, we find evidence that
the association between trade credit issuance and price changes during the crisis is
stronger for firms that experienced larger increases in liquidity costs and counterparty
risks.
Our results relate to several strands of the literature. First, the findings contribute
to the trade credit literature by advancing the understanding of how trade credit is
priced. In particular, this paper is, to the best of our knowledge, the first to empirically
document the existence of implicit interest rates in product prices, which suggests that
trade credit is priced even in the absence of explicit interest rates. Second, our results
contribute to the macroeconomic literatures on the influence of financial conditions
on firms’ price setting, such as the traditional cost channel literature (e.g., Christiano,
Eichenbaum, and Evans 1997; Barth and Ramey 2001; Ravenna and Walsh 2006) and
the closely related literature studying how liquidity constraints affect price markups
in the presence of customer markets (Chevalier and Scharfstein 1996; Gilchrist et al.
2017).
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TRADE CREDIT AND PRODUCT PRICING:

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Niklas Amberg Tor Jacobson

The editor in charge of this paper was Claudio Michelacci.

Journal of the European Economic Association 2020 00(0):1–32 DOI: 10.1093/jeea/jvaa007

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2. Institutional Background and Data

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2.2. Data and Variable Definitions

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2.3. Sample and Descriptive Statistics

TABLE 1. Descriptive statistics.

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A. Price and quantity variables (2004–2011)

3. Conceptual Framework and Empirical Approach

3.1. Conceptual Framework

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2004 2005 2006 2007 2008 2009 2010 2011

Sample firms Aggregate economy

2004 2005 2006 2007 2008 2009 2010 2011

Above median (fixed) Above median (yearly)

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3.2. Baseline Specification

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3.3. Potential Threats to Identification

The identifying assumption underlying the empirical specification detailed in the

TABLE 2. Covariate balance in the sample.

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Mean SD Mean SD h l  h=` h:95 `:95

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2004 2005 2006 2007 2008 2009 2010 2011

High τ in t−1 Low τ in t−1

We begin the presentation of our empirical findings with a graphical illustration of

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4.1. Baseline Results and Robustness Checks

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4.2. Accounting for Alternative Explanations

In the remainder of this section we assess the plausibility of several alternative

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5.1. The Liquidity-Cost Mechanism

5.1.1. Results Based on Precrisis Characteristics. We consider two measures of

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5.1.2. The Baltic Crisis as a Quasi-Experiment: Empirical Setup. In search of a

TABLE 4. Mechanism I—Liquidity cost pass-through.

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Panel A. Precrisis balance-sheet measures

(1) (2) (3)

Panel B. The Baltic crisis experiment

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(a) CDS spreads

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CDS (basis points)

(c) Lending to Swedish non−financial firms

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5.2. The Counterparty-Risk Mechanism

Mean SD Mean SD h l h=` h:95 `:95