Journal of Financial Economics 155 (2024) 103830

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Journal of Financial Economics

journal homepage: www.elsevier.com/locate/jfec

Trade credit and the stability of supply chains

Nuri Ersahin a, 1, Mariassunta Giannetti b, 1, *, Ruidi Huang a, 1
a
Cox School of Business at Southern Methodist University, United States
b
Stockholm School of Economics, the Swedish House of Finance, CEPR, and ECGI, Sweden

A R T I C L E I N F O A B S T R A C T

JEL codes: We show that trade credit flows increase when a firm in a production network becomes a less reliable supplier
D2 due to an operating shock. Affected firms extend more trade credit when their customers have lower switching
E23 costs or expect more disruption. Suppliers that are more dependent on the affected firms facilitate the trade credit
G3
extension. However, when financial constraints at the affected firms and their suppliers prevent the increase in
Keywords: trade credit, customers sever their relationships with the affected firms, and the sales of the affected firms and
Supply chains
their suppliers drop, suggesting that trade credit enhances production network stability.
Operating shocks
Production networks
Trade credit
Natural disasters

1. Introduction
Most studies of trade credit focus on bilateral supplier-customer re­
lationships, thus considering firms as either a borrower or a lender.
However, in the real world, firms are part of complex production net­
works and simultaneously act as borrowers and lenders. Technological
complementarities, incentives, and hold up problems along the supply
chain are crucial for the success of upstream and downstream com­
panies. Financial claims and obligations interlocking firms along the
supply chain could be used to improve incentives and enhance supply
chain stability, as suggested by theoretical work by Kim and Shin
(2012). However, we still have scant knowledge of the mechanisms
through which trade credit lubricates supply chain operations and on
whether it indeed enhances their stability.
This paper tests whether trade credit flows indeed serve as a “glue” to
cement supply chains by exploring changes in trade credit usage around
events that imperil the supply chain’s survival. We also investigate the
extent to which changes in trade credit provision depend on the in­
centives and constraints faced by the supply chain participants, and
crucially, the effects of trade credit on the stability of customer-supplier
relationships.
We conjecture that operating shocks impair firms’ reliability as
suppliers of goods and services and explore for the first time how in­
terdependencies over the supply chain affect the provision of trade
credit in their aftermath.2 Operating shocks affect a firm’s ability to
deliver timely and high-quality goods and services to customers and may
arise from natural disasters, strikes, cyberattacks, geopolitical tensions,
wars, or simply accidents. In most of our analysis, we consider tempo­
rary disruption to operations caused by natural disasters. Natural di­
sasters are known to disrupt firms’ operations and to propagate
upstream and downstream (see, e.g., Acemoglu et al., 2012; Barrot and
Sauvagnat, 2016; Carvalho et al., 2021) and have the advantage of being

* Corresponding author.
E-mail address: mariassunta.giannetti@hhs.se (M. Giannetti).
1
We thank Philipp Schnabl (the editor), an anonymous referee, Janet Gao, Emilia Garcia-Appendini, Maria Loumioti, Katie Moon, and conference and seminar
participants at the Edinburgh Corporate Finance Conference, the China International Conference in Finance (CICF), the Financial Intermediation Research Society
(FIRS) annual meeting, the 10th Moscow Finance Conference, the Northern Finance Association (NFA) Annual Meeting, the Hong Kong University, McGill University,
Michigan State University, Southern Methodist University, the Stockholm School of Economics, the University of Miami, the University of Texas at Dallas, and the
University of Utrecht for comments. Giannetti acknowledges financial support from the Jan Wallander and Tom Hedelius Foundation and the Karl-Adam Bonnier
Foundation.
2
We view operating shocks as inherently different from liquidity shocks, which have been more widely studied in the literature, because operating shocks affect a
firm’s ability to produce goods and services. See Acharya, Almeida, Amihud, and Liu (2022) for a similar distinction in a theoretical model. We elaborate on this point
in the literature review.

https://doi.org/10.1016/j.jfineco.2024.103830
Received 9 February 2023; Received in revised form 1 March 2024; Accepted 9 March 2024
Available online 21 March 2024
0304-405X/© 2024 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
N. Ersahin et al.
plausibly orthogonal to other firms’ shocks. However, we argue and
provide some evidence that our results are more general and, for
instance, hold when operating difficulties arise from uncertainty about a
firm’s ability to source inputs.
We build a simple framework in which operating shocks decreasing a
firm’s reliability as a supplier in expectation have the largest negative
effects on the production of downstream firms, which may incur losses if
inputs are delivered late or are of inferior quality. The customers of
affected firms may thus have incentives to look for other suppliers to
substitute or complement those experiencing operational difficulties.
Since customers are difficult to replace, the interruption of existing re­
lationships would be costly for the affected firms. Thus, in an attempt to
preserve the relationship as the expected quality of their services
weakens, firms experiencing operational difficulties may transfer sur­
plus to their customers through trade credit. This would be consistent
with theories and empirical evidence that firms use trade credit to
transfer surplus to their customers and expand their customer base
(Klapper et al., 2012; Murfin and Njoroge, 2015; Barrot, 2016; Breza and
Liberman, 2017; Giannetti et al., 2021; Grigoris et al., 2023).
The effects however are unlikely to stop at the affected firm and its
customers. As Glode and Opp (2023) note, if firms are interconnected
through sequential trade credit claims, their ability to extend liquidity to
their customers depends on their own liabilities and on whether they
expect those to be renegotiated. More generally, given that a firm’s
revenue depends on the revenues of its customers (Elliott et al., 2014),
lower sales for an affected firm with shrinking customer base would also
translate into smaller sales for their suppliers. Put differently, the spe­
cific production network to which a firm belongs is important for its
revenue. The suppliers of affected firms have a stake in the stability of
the whole supply chain and want to avoid the breakup of the relation­
ships between the affected firms and their customers. Thus, the suppliers
may extend more trade credit in order to facilitate the extension of the
affected firms’ trade credit.
Using customer-supplier linked data, we show that firms that are
affected by natural disasters provide more trade credit to their cus­
tomers and receive more trade credit from their suppliers. We are able to
confirm this finding using hand-collected trade credit data that allow us
to observe trade credit flows between customers and suppliers and to
identify the supply and demand of trade credit.
The finding that the accounts payable and the accounts receivable of
firms facing operational difficulties simultaneously increase would be
hard to reconcile without considering supply chain operations, as we do
in our framework. If trade credit were to flow from firms with easy ac­
cess to finance to firms experiencing negative shocks, as theories based
on the suppliers’ financial advantage would suggest (Petersen and
Rajan, 1997), we should observe that the accounts payable of affected
firms increase, while their accounts receivable do not vary or even
decrease. However, affected firms simultaneously provide and use more
trade credit, indicating that firms obtain trade credit from their suppliers
and pass it on to their customers, even if this behavior drains their
liquidity and may have negative consequences on investment (Murfin
and Njoroge, 2015).
We perform a number of cross-sectional tests to shed light on the
mechanisms driving our findings. First, we analyze how switching costs
affect the provision of trade credit. Customers purchasing products that
are easy to substitute face lower switching costs (Cunat, 2007). Hence,
firms supplying these products may have to transfer more surplus to
maintain their customers when they face operational difficulties. We
show that affected firms that produce easy to substitute products indeed
extend more trade credit to their customers. In addition, suppliers
extend more trade credit to the affected firms if the customers of the
latter can easily switch to alternative suppliers of the input. The fact that
not only the affected firms, but also their suppliers provide more trade
credit indicates that suppliers accommodate the provision of liquidity,
which is essential for the survival of the supply chain.
Second, we consider that the extent to which customers expect the
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Journal of Financial Economics 155 (2024) 103830
operations of a firm to be disrupted by natural disasters should matter
for trade credit flows. Accordingly, we observe that firms that can be
expected to deliver high-quality and timely inputs and services after a
natural disaster, because they have operations in many locations or have
matured a strong reputation with the customers, extend and receive less
trade credit.
Third, we show that the propensity of firms affected by natural di­
sasters and their suppliers to extend trade credit depends on their stakes
in the survival of the production network. Trade credit flows increase
more if the affected firm is highly dependent on a major customer
because the severance of the relationship would imply a larger drop in
sales for the affected firm and its suppliers. Furthermore, suppliers
provide more trade credit if they are highly dependent on the affected
firm. Overall, these findings suggest that firms use trade credit to
enhance supply chains’ survival.
To shed additional light on the mechanisms driving our findings, we
investigate the effects of financial constraints that limit trade credit
provision on the stability of supply chains. We find that following nat­
ural disasters, affected firms’ accounts payable do not increase if their
suppliers are financially constrained. Affected firms do not extend the
payment terms to their customers if both they and their suppliers are
financially constrained. Customers that do not receive more trade credit
in turn become more likely to terminate their relationships with the
affected firms and start new relationships. Consequently, the affected
firms’ and their suppliers’ sales decrease. Thus, pervasive financial
constraints over the supply chain limit trade credit usage and imperil the
stability of supply chains. On the contrary, supply chains remain stable
when the affected firms are financially constrained, but their suppliers
are not. In this case, thanks to the liquidity provided by their suppliers,
the affected firms are able to extend more trade credit, even if they are
financially constrained, and the consequences on the sales of the
affected firm and its suppliers are limited.
This paper contributes to several strands of the literature. First, by
exploring trade credit usage in response to operating shocks, we are the
first to show empirically that trade credit is used as a glue to enhance the
stability of production networks. The literature has so far focused on
bilateral relationships between customers and suppliers and emphasized
the role of financial constraints and customer bargaining power (see, e.
g., Petersen and Rajan, 1997; Cunat, 2007; Giannetti et al., 2011;
Klapper et al., 2012). A notable exception is Gofman and Wu (2022),
who document a number of stylized facts regarding a firm’s position in
the production network and trade credit provision. Our finding can help
explain why Gofman and Wu (2022) find that central and upstream
firms provide more trade credit: These firms are indirectly affected by
more downstream shocks through their customers and extend trade
credit to enhance the stability of their supply chains. We show that trade
credit provision depends not only on the characteristics of a firm’s
customers, but also on the characteristics of the customers’ customers. In
addition, while previous literature emphasizes that trade credit can
emerge because a firm has strong relationships with its clients (Wilner,
2000; McMillan and Woodruff, 1999), we show that it also enhances the
stability of direct and indirect customer-supplier links.
Second, a growing body of research documents how the transmission
of shocks over production networks affects the performance of cus­
tomers and suppliers and ultimately leads to shock propagation and
aggregate fluctuations (see, e.g., Hertzel et al., 2008; Barrot and Sau­
vagnat, 2016; Giroud and Mueller, 2019; Cen et al., 2020; Carvalho
et al., 2021; Pankratz and Schiller, 2021). In this context, trade credit
has been shown to help explain the propagation of negative shocks as
firms default on their suppliers (Kyiotaki and Moore, 1997; Boissay and
Gropp, 2013; Jacobson and van Schedvin, 2015). Several papers docu­
ment that firms that face liquidity shocks obtain more trade credit from
their suppliers and extend less trade credit to their customers (see, e.g.,
Love et al., 2007; Garcia-Appendini and Montoriol-Garriga, 2013;
Restrepo et al., 2019; Costello, 2020; Alfaro et al., 2021; Amberg et al.,
2021). Since firms affected by liquidity shocks provide less liquidity to
N. Ersahin et al.
their customers, trade credit is considered to amplify the initial shock.
The literature is silent on the effects of operating shocks on trade
credit provision. We introduce to the literature on trade credit the
distinction between liquidity and operating shocks and argue that
operating shocks are more pernicious than liquidity shocks for supply
chain stability because firms’ ability to produce is temporarily impaired
and affected firms may cause losses for their customers (Acharya et al.,
2022). Liquidity shocks do not hamper a firm’s ability to produce and
therefore do not affect as much as operating shocks the value of the
relationships for the affected firms’ customers. Following a liquidity
shock, customers have weak incentives to search for more reliable
suppliers of the products and are willing to renounce some trade credit
to save on switching costs and avoid a supplier’s default on its financiers.
Accordingly, following liquidity shocks, we do not expect an increase in
credit flows to cement supply chain relationships. We provide a con­
ceptual framework to explore how the financial structure of the supply
chain adapts to operating shocks. Our results imply that trade credit
enhances the stability of production networks after operating shocks.
2. Conceptual framework and testable implications
We consider a three-step production process, in which the most up­
stream firm, Firm 2, delivers an input to Firm 1, which transforms it and
delivers it to Firm 0. The output at each of the three steps of production
is I, aI, and a2I, where a>1. For simplicity, we assume that there is a
homogeneous good or, equivalently, that outputs are expressed in a
numeraire. Therefore, net of the payment for any inputs, the profits of
each stage of production are: I, I(a-1), and aI(a-1).3
In the empirical analysis, we consider the case in which an operating
shock affects Firm 1. Specifically, we consider an operating shock that
occurs at t=0, before I is shipped by Firm 2 and paid. Following such an
operating shock, the expected output of Firm 0 to be realized at t=1
incorporates the probability that the input is delivered late or is of
inferior quality, disrupting Firm 0′s production process. The expected
output of Firm 0 after an operating shock affecting Firm 1 is: x a2I, where
0<1-x<1 is the probability of disruption, arising from the fact that Firm
1 may deliver the input late or the input may be of inferior quality.
Following an operating shock to Firm 1, the expected profits of Firm
0 are consequently aI(xa-1). Firm 0 can avoid disruption by switching to
another supplier at t=0. Changing supplier implies switching costs K.
Thus, Firm 0 switches when Firm 1 has experienced an operating shock
if aI(xa-1)<aI(a-1)-K. That is, if K<(1-x) a2I.
If Firm 0 switches, we assume that it is hard for Firm 2 and Firm 1 to
find new customers to replace Firm 0. Consequently, Firm 1′s and Firm
2′s profits are equal to zero if Firm 0 switches supplier and the supply
chain collapses. If the operating shock occurs, but Firm 0 does not switch
supplier, for simplicity, we assume that the sales of Firm 1 and Firm 2 are
as large as without the operating shock. Thus, the total surplus that the
supply chain loses if Firm 0 switches is: aI+K.
Note that not only the affected firm would lose I(a-1), but also its
supplier has a stake in the survival of the supply chain because it would
lose, I. These assumptions capture that operating shocks have negligible
negative effects if the supply chain remains stable. Yet, they may have
considerable negative effects on the affected firm and its suppliers if the
production network is disrupted. For these reasons, in the absence of
financial constraints, both upstream firms have incentives to share part
of their future profits with Firm 0 to avoid the breakage of the supply
chain. In this respect, Firm 2 internalizes the need to preserve down­
stream customer relationships for the survival of the supply chain.
Specifically, if K<(1-x)a2I, Firm 1 and Firm 2 can prevent that Firm
0 switches to another supplier by transferring surplus.
Following Giannetti et al. (2021), we assume that surplus is trans­
ferred through trade credit. This may be the case for the following two
3
For simplicity, we assume that all production occurs at t=1.
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Journal of Financial Economics 155 (2024) 103830
reasons. First, in the presence of multiple customers, as in Giannetti et al.
(2021), trade credit allows firms to transfer different amounts of surplus
to customers with different switching costs, without charging different
input prices, a conduct that could be sanctioned by antitrust authorities.
Second, trade credit can provide a guarantee for the punctuality and
quality of the input delivery (Lee and Stowe, 1993; Long et al., 1993;
Klapper et al., 2012). In this context, trade credit can emerge without
any need to renegotiate if customers delay payments when uncertainty
on the quality and timely delivery of goods and services increases, while
affected firms do not enforce the repayment and continue to deliver the
inputs to maintain their customer relationships.
The subsidy through trade credit that Firm 1 provides to Firm 0 can
be written as ϕ0 aI. That is, Firm 1 allows Firm 0 to delay the payment for
part or all the input purchase aI, providing credit at a cost below Firm 0′s
cost of capital. The parameter ϕ0 capture the size of the subsidy that may
depend both on the amount of credit provided and the extent to which
this credit is subsidized. If trade credit is provided at zero cost, as an
increasing number of studies surveyed in Giannetti (2023) shows, ϕ0 can
be interpreted as the proportion of the purchase that Firm 0 can pay late.
Trade credit thus alters Firm 0′s condition for switching supplier. The
supply chain remains stable if: aI(xa+ϕ0 -1)≥aI(a-1)-K.
This yields the first set of empirical implications of our simple
framework.
Implication 1. Firms affected by operating shocks extend more trade
credit ϕ0 aI if their customers have low switching costs K or the expected
disruption due to the operating shock (1-x) is particularly high.
In the empirical analysis, not only do we test that on average firms
affected by operating shocks should extend more trade credit to their
customers, but we also explore the cross-sectional implications consid­
ering plausible proxies for K and x. For instance, the switching costs of
the customer of Firm 1 may depend on the availability of products that
are close substitutes provided by other suppliers, but also on the char­
acteristics of specific customers. Switching costs are largely fixed in
nature as in our simple model and are particularly low for large cus­
tomers (Draganska et al., 2010), which may thus require a larger
transfer not to switch supplier. In this case, besides transferring surplus,
as in Giannetti et al. (2021), trade credit may have the additional benefit
of not affecting the cost of the marginal unit purchased by Firm 0,
mitigating any costs from the cannibalization of Firm 1′s sales to other
smaller customers with potentially higher switching costs (which are
outside of our model). In sum, we expect that large firms with suppliers
affected by operating shocks should receive more trade credit.
Following an operating shock to its supplier, a customer’s inclination
to sever the relationship depends not only on its switching costs, but also
on the expected disruption. Any characteristics of the affected firm that
lower the expected disruption should be associated with less trade credit
provision. Expected disruption should be lower for firms that operate in
many locations, which can presumably continue to produce and ship the
input from unaffected plants. Similarly, firms with more inventories may
have finished products ready to ship to their customers, thus limiting
backlogs and disruption for downstream firms.
We also consider that the expected disruption may be lower for firms
that have developed a strong reputation with their customers. Strong
reputation is likely to be associated with relationship length, which may
also reveal high switching costs for the customers that have tailored
their production processes to those suppliers for a long time. Both effects
would go in the direction of decreasing the provision of trade credit by
the company experiencing operating shocks. Another proxy for reputa­
tion is linked to the superstar status of a company. The largest firms in an
industry are often considered superstars (Autor et al., 2020; Gutierrez
and Philippon, 2019). These firms are also harder to substitute for more
reliable suppliers. Thus, we expect that they provide less trade credit
when they are hit by operating shocks.
The model also highlights that the output disruption occurring when
N. Ersahin et al.
a customer switches affects not only the direct supplier but also the
upstream firms, that is, the supplier of the supplier. Both Firm 1′s and
Firm 2′s propensity to provide trade credit depends on their stakes in the
survival of the supply chain. Specifically, Firm 2′s stake consists of its
profits from the sales to the affected firm. Importantly, on average, the
amount of trade credit that Firm 2 needs to provide to guarantee the
survival of the supply chain depends on Firm 0′s switching costs and
expected disruption and not only on the characteristics of Firm 1.
Also, our simple framework assumes that both Firm 1 and Firm 2
have only one customer. More realistically, firms have many customers.
In the presence of holdup concerns related to relationship-specific in­
vestments, the suppliers’ loss from losing a relationship increases more
than proportionally when a firm loses a major customer, a feature that is
often considered to depend on the size of the buyer relative to the seller
(Klein et al., 1978; Williamson, 1979; Chipty and Snyder, 1999; Inderst
and Wey, 2007), because large customers are particularly difficult to
replace. For these reasons, affected firms and their suppliers are ex­
pected to be particularly inclined to extend trade credit to major cus­
tomers. Based on the above considerations, not only do we expect that
affected firms extend more trade credit if they are particularly depen­
dent on a large customer, but also that the suppliers of affected firms do
so if they are highly dependent on the affected firm, as in this case the
supply chain drives a larger share of Firm 2′s profits and Firm 2 thus has
a larger stake in its survival. In addition, Firm 2 is expected to provide
more trade credit if Firm 1 has a major customer that quitting would
jeopardize both Firm 1′s and Firm 2′s sales. Implication 2 summarizes
the above discussion.
Implication 2. Upstream firms’ propensity to extend trade credit after an
operating shock depends on their stake in the supply chain’s survival and the
characteristics of Firm 0, affecting Firm 1′s liquidity needs.
Firms’ financing costs also play an important role. While ϕ0 aI is the
value of the subsidy to Firm 0, the cost of this transfer for Firm 1 depends
on its cost of capital and it is equal to ϕ1 aI, where ϕ1 >ϕ0 if Firm 1 is
more financially constrained. Tighter financing constraints for Firm 1
imply higher financing costs. Thus, extending trade credit reduces the
profits of Firm 1 to aI(1-ϕ1 )-I. If Firm 1 is financially constrained and has
a high cost of capital, its payoff from extending enough trade credit to
satisfy Firm 0′s participation constraint may become negative. Thus, if
ϕ1 >1–1/a, the firm has no incentive to provide a transfer that satisfies
Firm 0′s participation constraint. In this case, the provision of trade
credit needs to be facilitated by the supplier, which can extend cheap
liquidity to the affected firm in order for the supply chain to survive.
Firm 2 will have incentives to do so as long as it is financially uncon­
strained and its profits cover the financing cost ϕ2 : I(1-ϕ2 ) > 0.
Implication 3. If the affected firm is financially constrained, the ability of
Firm 2 to extend trade credit is crucial for the supply chain survival.
Implications 2 and 3 highlight the role of the suppliers of affected
firms. When both ϕ1 and ϕ2 are large, implying that the affected firm
and its supplier are financially constrained, trade credit flows do not
increase and the supply chain collapses.
The provision of liquidity by suppliers to firms affected by negative
shocks mirrors the findings of papers exploring how supply chains adapt
when liquidity shocks occur (see, e.g., Costello, 2020; Amberg et al.,
2021) because suppliers’ profits are jeopardized by the breakage of
downstream customer-supplier relationships, regardless of the nature of
the shock. Operating shocks differ from liquidity shocks for their effects
on the customers, which are directly exposed to issues with the quality
and timely delivery of the affected firm’s products only when operating
shocks occur. In the case of a liquidity shock, x is equal to 1 if Firm 1 has
enough liquidity not to be forced to default by external financiers. Firm
0 is thus willing to renounce some trade credit to guarantee Firm 1′s
survival and save the switching cost K.
In what follows, we explore how trade credit flows vary following
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Journal of Financial Economics 155 (2024) 103830
operating shocks and the effects of constraints to trade credit provision
on the stability of supply chains.
3. Data and summary statistics
To test our hypotheses, we need information on supply chains,
operating shocks, and financial information to measure trade credit
flows and evaluate the cross-sectional implications of our theoretical
framework. Below, we introduce our data and most important proxies.
3.1. Supply chains and trade credit
We obtain firms’ financial information and the location of the
headquarters from Compustat North America Fundamentals Quarterly
Database. We exclude firms in the utility industries (SIC code 4900 –
4999), the financial services industries (SIC code 6000 – 6999), and
government entities (SIC code 9000 – 9999) and construct two supply
chain datasets, which complement each other.
The first dataset merges Compustat with supply chain relationships
from Factset Revere Supply Chain Relationship database. Factset Revere
identifies customer and supplier relationships from SEC 10-K annual
filings, investor presentations and press releases. Following Adelino
et al. (2023), we make use of the reported information on customer and
supplier relationships to create a comprehensive network of supply
chain interconnections.4
Factset Revere spans the period 2003 – 2019. Overall, we observe
7806 customers and 8306 suppliers. For the average firm in the sample,
we observe 21 customers and 20 suppliers. Since Factset does not pro­
vide information on how much trade credit is used in a relationship, we
proxy for trade credit flows using information on accounts payable and
accounts receivable from Compustat. As is common in the literature
(Petersen and Rajan, 1997), we scale accounts payable by the costs of
goods sold and accounts receivable by sales to measure the amount of
funding a firm receives from its suppliers and the provision of trade
credit to its customers.5
The second dataset relies on hand-collection of information on the
amount of trade credit extended by a firm to its important customers as
recorded in the 10-K disclosures to the SEC. Starting from 1990, the
Financial Accounting Standard Board’s (FASB) regulation No. 105 re­
quires firms to disclose any concentration of credit risk.6 Typically, large
amounts of accounts receivable to a major customer qualify as concen­
tration of credit risk. In fact, page 12 of FASB 105 states: “A contractual
4
The customer relationships we observe from Factset Revere are less affected
by the limitation of datasets that rely on information from the Statement of
Financial Accounting Standard (SFAS) No.131, which requires firms to disclose
the existence and sales to principal customers representing more than 10% of
total firm revenues.
5
As we discuss in Subsection 4.1, our results are not driven by a decrease in
the denominator of the proxies for payables and receivables. Note that even if
this were the case, the estimates would suggest that firms provide short-term
funding to customers for a larger fraction of their sales and receive financing
for a larger fraction of their costs despite the fact that trade credit may not be an
active contractual choice but simply arise from late payments. In fact, trade
credit is thought to be used to curb shocks to corporate liquidity precisely
because firms that need liquidity may choose to pay their suppliers late, which
in turn accommodate their liquidity needs by not enforcing the repayment and
continuing to deliver the inputs (see Amberg et al., 2021). A related argument
could be extended to customers, which could automatically delay payments if
uncertainty about the quality and timely delivery of goods and services
increases.
6
FASB 105 filings provide “Disclosure of Information about Financial In­
struments with Off-Balance-Sheet Risk and Financial Instruments with Con­
centrations of Credit Risk.” Thus, we observe receivables and sales in a bilateral
relationship because these are on-balance-sheet items that involve concentra­
tion of credit risk.
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

right to receive cash in the future is a financial instrument. Trade ac­ a quarter, which is less than 5% of the total number of counties in the U.
counts, notes, loans, and bonds receivable all have that characteristic.” S.
Due to these requirements, firms may disclose the name of a customer We introduce additional proxies in the empirical analysis and define
and its accounts receivable balance, either as a dollar amount or as a all the variables in Appendix A. Table 1 presents the summary statistics
percentage of total accounts receivable, in their annual reports (10-Ks). of our samples.
This source of disclosure is preferable for our purposes to information on
major customers available through SFAS No. 14 (before 1997) and SFAS 4. Main results
No. 131 (after 1997) because firms report the amount of receivables
from a given customer. 4.1. Affected firms
To collect these data, we use a procedure similar to that of Murfin
and Njoroge (2015) and Freeman (2020). Specifically, we first download The main insight of our simple theoretical framework is that the
Compustat Customer Segment files from 1991 to 2019.7 From the provision of trade credit of a firm to its customers should increase if the
Compustat Segment files, we observe major customers, defined as cus­ firm experiences operating difficulties, which we proxy using natural
tomers who account for at least 10% of the firm’s sales, and the corre­
sponding sales amount. For each of these firms, we extract all available
10-K filings from EDGAR. We then read all 10-K filings and look for Table 1
information regarding major customers and concentration of credit risk. Summary statistics.
In the Internet Appendix (IA), Figure IA.1 presents excerpts from 10-Ks N Mean SD P25 P50 P75
of firms reporting accounts receivable balances from specific customers. [1] [2] [3] [4] [5] [6]
We manually collect the name of the customer, the sales amount (or as a Panel A: Compustat-Factset Revere
percentage of total sales) to the customer, and the accounts receivable Change in 107,106 0.015 0.955 − 0.070 0.003 0.076
balance (or as a percentage of total accounts receivable) from the payables
Change in 107,106 0.014 0.356 − 0.052 0.001 0.058
customer. Finally, we hand-match the customers to Compustat annual receivables
files by name. We require sales information between each customer and Change in net 107,106 − 0.001 0.473 − 0.064 0.000 0.065
supplier pair in the Compustat Segment data to be non-missing to receivables
construct our variables of interest. Change in cash 107,106 − 0.003 0.075 − 0.031 0.000 0.030
Change in assets 107,106 0.061 0.224 − 0.045 0.040 0.144
We refer to this second dataset as the “SEC sample.” The final SEC
Change in write 107,106 0.000 0.027 0.000 0.000 0.000
sample has an annual frequency and includes 729 firms (both customers down
and suppliers) from 1991 to 2019. We observe a total of 317 customers Change in log 107,106 0.061 0.231 − 0.053 0.053 0.167
and 430 suppliers. On average, we observe 1.59 customers and 2.15 sales
suppliers per firm. While the SEC sample has limitations due to the small Change in 107,106 − 0.047 0.793 − 0.266 − 0.002 0.213
investment
size and selection in firms’ reporting, its advantage is that we observe
Change in COGS 107,106 0.052 0.244 − 0.061 0.051 0.169
the amount of trade credit to a given customer. As we explain below, this Change in ROA 107,106 − 0.001 0.027 − 0.008 0.000 0.007
will allow us to absorb non-parametrically customer (or supplier) un­ Disaster dummy 107,106 0.022 0.148 0.000 0.000 0.000
observed heterogeneity and sharpen the interpretation of our main Size 107,106 6.989 1.907 5.621 7.243 8.659
Leverage 107,106 0.240 0.220 0.041 0.209 0.362
findings.
Age 107,106 2.645 0.996 2.079 2.773 3.367
Profit 107,106 − 0.007 0.064 − 0.008 0.009 0.020
3.2. Natural disasters Fluidity 84,996 6.854 3.305 4.298 6.214 8.724
HHI 107,106 0.144 0.119 0.055 0.101 0.196
Number of states 107,106 11.652 14.219 1 5 17
Our conceptual framework implies that any shocks leading to oper­ High inventory 107,106 0.495 0.500 0 0 1
ating difficulties, such as strikes, labor or input shortages, and regula­ Relationship 107,106 3 1.985 1.667 2.546 4
tions, should affect trade credit flows in the production network. We length
Superstar 107,106 0.027 0.161 0 0 0
consider operating difficulties arising from natural disasters in a firm’s
Relative size 107,106 1.531 2.822 − 0.809 1.297 3.745
headquarters county, because natural disasters are exogenous and un­ Major customer 107,106 0.254 0.435 0 0 1
likely to be correlated with firm shocks. In addition, they have been Percentage of 106,656 0.096 0.195 0 0 0.115
documented to lead to operating difficulties for the affected firms and constrained
their customers (Barrot and Sauvagnat, 2016), as implied by our theo­ suppliers (mkt
cap)
retical framework. Percentage of 106,656 0.443 0.319 0.200 0.429 0.667
We identify the date and estimated damages of natural disasters as constrained
well as the FIPS codes of the affected counties using SHELDUS (Spatial suppliers
Hazard and Loss Database for the United States), a database by the (bond rating)
Change in 94,623 0.028 0.316 − 0.098 0 0.160
Center for Emergency Management and Homeland Security at Arizona
number of
State University.8 Following Barrot and Sauvagnat (2016), we consider customers
natural disasters with estimated damages larger than 1 billion 2012 Change in 82,911 − 0.034 0.493 − 0.208 0 0.140
dollars. We require the disaster to last less than 30 days. number of new
The sample covers 42 disasters, including blizzards, earthquakes, suppliers
Panel B: SEC sample supplier-customer level
floods, and hurricanes. These disasters affect a broad range of U.S. states
Change in trade 2279 − 0.005 0.073 − 0.039 − 0.003 0.031
and counties over the sample period. However, they are generally very credit
localized and affect on average 47 counties, and at most 156 counties in Affected 2279 0.040 0.196 0 0 0
customer
Affected supplier 2279 0.055 0.229 0 0 0
7
FASB 105 has been superseded by ASC 825 for fiscal years beginning after This table presents summary statistics for the two samples used in our analysis.
December 15, 2018. Our sample only overlaps with the new regulation by one Panels A reports the firm-quarter level Factset Revere and Compustat merged
year. As we show in the internet appendix, excluding the last year of the sample sample. Panel B reports the customer-supplier-year level SEC sample. Columns 1
leaves our results unchanged (Table IA.1). to 6 report the sample size, mean, standard deviation, 25th, 50th, and 75th
8
See https://cemhs.asu.edu/sheldus percentile, respectively. All variables are defined in Appendix A.

5
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

disasters in the county of the headquarters. Using the Factset Revere disasters on firms’ accounts payable and receivable. First, in columns 1
sample, we estimate a difference-in-differences equation at the firm- and 6, we exclude the interactions of state and year and industry and
quarter level similar to the one used by Barrot and Sauvagnat (2016): year fixed effects. Those fixed effects help refine the identification
strategy but significantly narrow the source of variation. It is thus
ΔYi,t,t+4 = β0 + β1 Affectedit + β2 × Xi,t + ηi + ηt + ηj(i),y(t) + ηg(i),y(t) + εi,t,
comforting that our results are qualitatively and quantitatively
(1) invariant. In addition, the effects of natural disasters on the affected
firms’ payables and receivables are invariant if we include a dummy that
where Yi,t is typically either the ratio of accounts payable to the cost of
takes value equal to one for affected customers in the regression for
goods sold or the ratio of accounts receivable to sales. We study how
receivables (columns 2, 3, and 5) and a dummy for affected suppliers in
proxies for the use of trade credit and other firms’ policies change in the
the regression for payables (columns 7, 8, and 10). This indicates that
following four quarters. More specifically, we construct ΔYi,t, t+4 as the
our results are not driven by the fact that customers or suppliers of
change in the outcome variable between quarters t + 4 and t. Our var­
affected firms being located in the same county are also affected by
iable of interest, Affectedit , takes value equal to one if firm i is affected by
natural disasters. Results are equally invariant to the inclusion of the
a natural disaster in quarter t.9
triple interactions between state, industry, and year fixed effects (col­
Throughout the analysis, we control for firm size, leverage, age, and
umns 4, 5, 9, and 10).
profits as well as the exposure of the firm’s customers and suppliers to
Overall, these findings contrast with evidence that firms that expe­
the natural disaster. We also absorb unobserved heterogeneity by
rience negative liquidity shocks require faster payments from customers
including firm (i) fixed effects, year-quarter (t) fixed effects, interactions
(Amberg et al., 2021) and are consistent with our conjecture that
of firm i’s industry (j(i)) and year (y(t)) fixed effects as well as in­
operating shocks are different because they decrease firms’ reliability in
teractions of the firm i’s state (g(i)) and year (y(t)) fixed effects. The
delivering the product. Table IA.6 and its dynamic version in Table IA.5
inclusion of these fixed effects allows us to explore whether the behavior
show that customers of affected firms indeed experience a drop in sales,
of firms in counties affected by natural disasters changes in the four
as documented by Barrot and Sauvagnat (2016), and may thus have
quarters following the disaster in comparison to other firms in the same
incentives to look for more reliable suppliers, as suggested by our
year, state, and industry. We cluster standard errors at the firm level,
theoretical framework. Trade credit could, therefore, be used as a glue to
which is particularly important because our dataset includes over­
enhance the stability of the production network when negative oper­
lapping quarters.
ating shocks occur.
Table 2 shows that in the year following a natural disaster, the ratio
Before evaluating whether cross-sectional differences in trade credit
of accounts payable relative to the cost of goods sold increases by 8
are consistent with our hypothesis, we carry out several additional tests
percentage points (column 1). Contextually, affected firms’ receivables
to evaluate the robustness of our result that firms affected by natural
relative to sales increase by 2 percentage points indicating that they
disasters offer more trade credit. First, Table 4 tests for the existence of
extend more trade credit to their customers (column 2).10 In fact, firms
pre-existing trends that could invalidate our identification strategy. We
appear to entirely pass the extra liquidity received from their suppliers
estimate Equation (1) using indicator variables that equal one if the firm
to their customers, as shown by the fact that in column 3 the net re­
or one of its customers (suppliers) is impacted by a natural disaster in the
ceivables, defined as accounts receivable minus accounts payable scaled
quarters following the interval in which we consider the change in trade
by sales, are neither statistically nor economically different from zero.
credit usage (after t+4). The estimates confirm that changes in trade
The rest of the table considers how natural disasters affect other
credit usage do not emerge before the disaster.12
corporate outcomes. Natural disasters appear to be associated with an
We also conduct a placebo test, which helps to address the concern
increase in write-downs (column 4), but we do not detect a statistically
that a latent variable correlated with natural disasters, not captured by
significant effect on cash, assets, sales,11 cost of goods sold, or invest­
our control variables and fixed effects, may be driving our results. To
ment, suggesting that the overall effects of natural disasters on firm
implement the test, we assume that natural disasters happen in nearby
performance may indeed be negligible if the supply chain survives.
counties that are within 50 miles of the actual disaster counties.
However, Table IA.4 shows that affected firms’ sales drop in less
Table IA.8 shows that the receivables and payables of firms in counties
demanding specifications that do not include state × time and industry
that are close but unaffected by natural disasters do not change, indi­
× time fixed effects, indicating that on average natural disasters lead to a
cating that unobserved shocks correlated with natural disasters are un­
drop in the scale of operations. This conclusion is invariant in Table IA.5
likely to drive our findings.
where we consider the dynamics of affected firms’ sales.
In Table 3, we evaluate the robustness of the effects of natural
4.2. Suppliers of affected firms

9
In Table IA.2, results are robust if we consider the change in the dependent
variable between t-1 and t+4 to address concerns that natural disasters occur
during the quarters, while receivables and sales are measured at the end of the
quarter. Our definition of the dependent variable reflects that contracts for
trade credit, sales, and input purchases are likely to be outstanding when a
natural disaster hits. It is therefore unlikely that the end-of-period variables
reflect the effects of the natural disaster.
10
The magnitude of the increases in accounts payables and accounts receiv­
ables are not comparable because the former is standardized by the cost of
goods sold and the latter by sales, which are significantly larger. In fact,
Table IA.3 shows that the percentage changes in accounts payables and re­
ceivables are comparable. Table IA.3 also assuages concerns that our results on
trade credit are driven by changes in firm output (sales) and input (cost of
goods sold), which are the denominators of our main measures.
11
Barrot and Sauvagnat (2006) also estimate statistically insignificant effects
of natural disasters on affected firms’ sales and cost of goods sold when they
include interactions of industry and year and interactions of state and year fixed
effects (see their Table 5, Panels A and B, columns 3 and 4).
Given that we observe an increase in payables for the affected firms,
the receivables of the affected firms’ suppliers should increase as a
result. We present the results in Table 5 Panel A columns 1 and 2. The
dependent variable is a firm’s ratio of accounts receivable to sales. The
positive and statistically significant coefficient on the dummy variable
12
Two-way-fixed-effects estimates of staggered treatments may be biased if
the timing is dynamic or there is treatment effect heterogeneity across groups
(Baker, Larcker and Wang, 2022). If the effect of natural disasters on the change
in trade credit is temporary, this bias should not affect our estimates because at
a given point in time, the overwhelming majority of observations are untreated.
To assuage any concerns, Table IA.7 reproduces Table 3 using stacked re­
gressions (e.g., Gormley and Matsa, 2011; Cengiz, Dube, Lindner, and Zipperer,
2019). More specifically, we treat each natural disaster as an event and match
the treated firms to control firms that have never been affected by a natural
disaster. We then estimate a pooled regression by including all the events along
with event times year-quarter fixed effects. Our main results remain unchanged.

6
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 2
The impact of natural disasters on firms’ policies.
Change in Change in Change in net Change in Change in Change in Change in log Change in Change in
payables receivables receivables write down cash assets sales COGS investment

[1] [2] [3] [4] [5] [6] [7] [8] [9]

Affected 0.080*** 0.020*** 0.001 0.002*** − 0.002 0.002 0.005 − 0.006 0.011
(0.024) (0.007) (0.012) (0.001) (0.001) (0.003) (0.004) (0.005) (0.021)
Size − 0.003 − 0.015*** 0.005 − 0.000 − 0.005*** − 0.151*** − 0.066*** − 0.056*** − 0.035***
(0.015) (0.005) (0.007) (0.000) (0.001) (0.005) (0.004) (0.004) (0.009)
Leverage − 0.091 − 0.022 0.039 − 0.001 0.024*** − 0.132*** − 0.037*** − 0.066*** 0.050
(0.070) (0.021) (0.032) (0.002) (0.005) (0.015) (0.012) (0.013) (0.031)
Age 0.010 − 0.006 − 0.026*** 0.000 0.010*** − 0.010 − 0.022*** − 0.023*** 0.051***
(0.021) (0.007) (0.010) (0.000) (0.002) (0.007) (0.006) (0.006) (0.014)
Profit − 0.078 0.340*** − 0.449*** − 0.079*** − 0.069*** 0.165*** − 0.295*** 0.311*** 0.296***
(0.166) (0.047) (0.083) (0.010) (0.009) (0.032) (0.029) (0.028) (0.075)
Firm FE YES YES YES YES YES YES YES YES YES
Year-quarter YES YES YES YES YES YES YES YES YES
FE
State x year FE YES YES YES YES YES YES YES YES YES
Industry x year YES YES YES YES YES YES YES YES YES
FE
Observations 93,702 93,702 93,702 93,702 93,702 93,702 93,702 93,702 93,702
R-squared 0.136 0.132 0.135 0.135 0.162 0.402 0.345 0.294 0.138

This table reports estimates of the effects of natural disasters on firms’ policies. The unit of observation in each regression is a firm-quarter. The dependent variables are
changes in the firm characteristics indicated on top of each column, defined as the difference between the value of the characteristic in quarter t + 4 and t. For example,
we define the change in accounts payable as APt+4 /COGSt+4 − APt /COGSt . The main independent variable is Affected, which is an indicator variable that equals one if a
firm is located in a county that is impacted by a natural disaster in quarter t and zero otherwise. Firm controls include size, leverage, age, and profitability. All variables
are defined in Appendix A. Robust standard errors clustered by firm are in parentheses. Statistical significance at the 1%, 5%, and 10% level is denoted by ***, **, and
*, respectively.

Table 3
The impact of natural disasters on firms’ receivables and payables.
Change in Change in Change in Change in Change in Change in Change in Change in Change in Change in
receivables receivables receivables receivables receivables payables payables payables payables payables
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

Affected 0.023*** 0.022*** 0.019** 0.019** 0.019** 0.084*** 0.084*** 0.080*** 0.079*** 0.080***
(0.008) (0.008) (0.007) (0.008) (0.008) (0.023) (0.024) (0.024) (0.025) (0.025)
Size − 0.010** − 0.010** − 0.015*** − 0.020*** − 0.020*** − 0.006 − 0.006 − 0.003 − 0.001 − 0.001
(0.005) (0.005) (0.005) (0.006) (0.006) (0.014) (0.014) (0.015) (0.018) (0.018)
Leverage − 0.024 − 0.024 − 0.022 − 0.009 − 0.009 − 0.053 − 0.053 − 0.091 − 0.158** − 0.158**
(0.019) (0.019) (0.021) (0.024) (0.024) (0.062) (0.062) (0.070) (0.080) (0.080)
Age − 0.010 − 0.010 − 0.006 − 0.003 − 0.003 0.018 0.018 0.010 0.015 0.015
(0.007) (0.007) (0.007) (0.009) (0.009) (0.017) (0.017) (0.021) (0.028) (0.028)
Profit 0.346*** 0.346*** 0.341*** 0.335*** 0.335*** − 0.118 − 0.118 − 0.078 − 0.028 − 0.028
(0.045) (0.045) (0.047) (0.051) (0.051) (0.165) (0.165) (0.166) (0.160) (0.160)
Affected 0.004 0.003 0.002
customer
(0.004) (0.004) (0.004)
Affected − 0.000 − 0.003 − 0.005
supplier
(0.012) (0.013) (0.013)
Firm FE YES YES YES YES YES YES YES YES YES YES
Year-quarter FE YES YES YES YES YES YES YES YES YES YES
State x year FE NO NO YES Subsumed Subsumed NO NO YES Subsumed Subsumed
Industry x year NO NO YES Subsumed Subsumed NO NO YES Subsumed Subsumed
FE
State x industry NO NO NO YES YES NO NO NO YES YES
x year FE
Observations 107,106 107,106 93,702 93,450 93,450 107,106 107,106 93,702 93,450 93,450
R-squared 0.111 0.111 0.132 0.232 0.232 0.120 0.120 0.136 0.225 0.225

This table reports the effects of natural disasters on firms’ receivables and payables. The unit of observation is a firm-quarter. The dependent variables are changes in
receivables (columns 1 to 5) and payables (columns 6 to 10), defined as the difference between the ratio of receivables to sales and the ratio of payables to the cost of
goods sold in quarter t+4 and t, respectively. The main independent variable is Affected, which is an indicator variable that equals one if a firm is located in a county
that is impacted by a natural disaster in quarter t and zero otherwise. Firm controls include size, leverage, age, and profitability in quarter t. We also control for affected
customer (supplier) when using change in receivables (payables) as the outcome variable. All variables are defined in Appendix A. Robust standard errors clustered by
firm are in parentheses. Statistical significance at the 1%, 5%, and 10% level is denoted by ***, **, and *, respectively.

Supplier of affected firm confirms the earlier result that suppliers extend experienced natural disasters. Only 5.85% of the sample firms are
more trade credit to firms that have been affected by a natural disaster. located in the same county as their customers. This is therefore unlikely
In column 2, we take into account that suppliers may have also to drive our findings. Nevertheless, we include the Affected dummy in

7
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 4 other customers during a given year, estimating the following equation:
Testing for pre-existing trends in firms’ receivables and payables.
ΔyReceived
i,s,y,y+1 = β0 + β1 Affectediy + ηs,y + εi,y, (2)
Change in Change in
receivables payables
[1] [2] where i denotes the firm, s the supplier, and y the year. The inclusion of
interactions of supplier and year fixed effects (ηs,y ) allows us to compare
Disaster hits firm t 0.018** 0.078***
(0.007) (0.024)
the trade credit provided by the same supplier to customers that have
Disaster hits firmt+5 − 0.014 − 0.034 differential exposure to natural disasters and to statistically demonstrate
(0.009) (0.023) that the supplier’s ability or need to provide trade credit does not drive
Disaster hits firmt+6 − 0.012 − 0.031 our findings. Put differently, similarly to Khwaja and Mian (2008), this
(0.010) (0.033)
within-supplier estimator allows us to identify customers’ demand for
Disaster hits firmt+7 − 0.002 − 0.013
(0.010) (0.027) trade credit.
Disaster hits firmt+8 − 0.007 − 0.006 We present the results in column 1. The positive and significant co­
(0.008) (0.025) efficient on the Affected dummy implies that a firm affected by natural
Disaster hits one customer (supplier) t 0.003 − 0.002 disasters receives 18% more trade credit in the following year in com­
(0.004) (0.013)
Disaster hits one customer − 0.000 − 0.004
parison to other customers of the same supplier.13
(supplier)t+5 Our narrative so far has been that suppliers extend more trade credit
(0.005) (0.011) to affected firms. The increase in affected firms’ payables however may
Disaster hits one customer − 0.003 0.004 not be an active decision of the suppliers. Affected firms may delay
(supplier)t+6
payments and suppliers may withhold or decrease new shipments. Such
(0.005) (0.012)
Disaster hits one customer − 0.004 0.011 an explanation would not support our hypothesis that suppliers facilitate
(supplier)t+7 the provision of trade credit. To evaluate the merit of this alternative
(0.005) (0.012) explanation, we test whether suppliers’ sales to affected firms indeed
Disaster hits one customer 0.003 − 0.006 decrease. Table IA.10 shows that this is not the case. Consistent with our
(supplier)t+8
(0.004) (0.012)
maintained hypothesis, suppliers appear to support the affected firms
Controls YES YES with new shipments while allowing slack in the payments.
Firm FE YES YES
Year-quarter FE YES YES
4.3. Customers of affected firms
State x year FE YES YES
Industry x year FE YES YES
Observations 93,702 93,702 Following an argument similar to Subsection 4.2, if the receivables of
R-squared 0.133 0.136 the affected firms increase, we should observe a corresponding increase
This table tests whether changes in firms’ receivables and payables predate in the payables of the affected firms’ customers. We test this conjecture
natural disasters. The unit of observation in each regression is a firm-quarter. using the Factset Revere sample and present the results in Table 5 Panel
The dependent variables are changes in receivables (column 1) and payables A columns 3 and 4. We find a positive and statistically significant co­
(column 2), defined as the difference between the ratio of receivables to sales efficient on the dummy variable Customer of affected firm. This implies
and payables to the cost of goods sold in quarter t + 4 and t, respectively. The that customers of firms affected by natural disasters have higher pay­
independent variables, Disaster hits firmt, Disaster hits firmt + 5, Disaster hits firmt + ables, suggesting that they are offered more trade credit. In column 4 of
6, Disaster hits firmt + 7, and Disaster hits firmt + 8, are indicator variables that Table 5 Panel A, we take into account that customers may have also
equal one if the firm is impacted by a natural disaster in the current, five, six,
experienced disruption due to natural disasters. We thus control for the
seven, and eight subsequent quarters, respectively, and zero otherwise. Disaster
Affected dummy. The estimated coefficient on Customer of the affected
hits one customer (supplier)t, Disaster hits one customer (supplier)t + 5, Disaster hits
one customer (supplier)t + 6, Disaster hits one customer (supplier)t + 7, and Disaster
firm in column 4 shows that the result in column 3 is robust.
hits one customer (supplier)t + 8, are indicator variables that equal one if one of In Table 5 Panel B column 2, we exploit the fact that the same
their customers (suppliers) is impacted by a natural disaster in the current, five, customer is reported by many suppliers and test whether affected sup­
six, seven, and eight subsequent quarters, respectively, and zero otherwise when pliers provide more trade credit to a given firm than unaffected sup­
using change in receivables (payables) as the outcome variable. Since disasters pliers. Specifically, we estimate the following equation:
at five, six, seven, and eight subsequent quarters occur after the change in the
dependent variable, i.e., between t and t + 4, their inclusion allows us to test for ΔyExtended
i,c,y,y+1 = β0 + β1 Affectediy + ηc, y + εi,y, (5)
pre-existing trends. Firm controls include size, leverage, age, and profitability in
quarter t. All variables are defined in Appendix A. Robust standard errors clus­ where i denotes the firm, c the customer, and y the year. The inclusion of
tered by firm are in parentheses. Statistical significance at the 1%, 5%, and 10% interactions of customer and time fixed effects allows us to control for
level is denoted by ***, **, and *, respectively. the customer’s demand for trade credit and test whether firms affected
by natural disasters supply more trade credit to a given customer in
the regression. The increase in receivables for affected firms’ suppliers comparison to other firms.
appears even larger once we control for this effect. The magnitudes of The estimates provide clear evidence that firms affected by natural
the effects are not only statistically, but also economically significant. disasters extend more trade credit to their customers in comparison to
The coefficient on Supplier of affected firm in column 2 implies an in­ other suppliers. The estimated coefficient on the Affected supplier
crease in receivables of 1.6 percentage points, which is around 3% of the dummy is statistically significant and economically meaningful, as it
median receivables level. This is equivalent to a 19 million-dollar in­ implies a 15% increase in trade credit extended by suppliers affected by
crease in accounts receivable for the average firm. natural disasters.
In Panel B, we rely on the SEC sample in which we observe the actual In sum, our results clearly show that trade credit flows in production
amount of trade credit in a relationship. As discussed in Section 3, this
sample allows us to differentiate between supply and demand effects on
13
the amount of trade credit and test our maintained hypothesis that un­ One may also wonder to what extent variation in the customers that firms
affected suppliers should offer more trade credit only to clients that have report in FABS 105 from year to year may affect the estimates. In Table IA.9, we
been affected by a natural disaster. Specifically, we evaluate the extent re-estimate Table 5 Panel B using a balanced sample of customer-supplier re­
to which a supplier extends trade credit to affected firms relative to lationships. Our estimates are qualitatively invariant, showing that the selection
of customers that firms report from year to year does not drive our findings.

8
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 5
Natural disasters and affected firms’ suppliers and customers.
Panel A: Compustat/Factset Revere sample
Suppliers of affected firms Customers of affected firms
Change in receivables Change in receivables Change in payables Change in payables
[1] [2] [3] [4]

Supplier of affected firm 0.013** 0.016**

(0.007) (0.008)
Customer of affected firm 0.036* 0.032*
(0.019) (0.019)
Affected 0.012* 0.077***
(0.007) (0.025)
Size − 0.014** − 0.014** − 0.007 − 0.007
(0.006) (0.006) (0.015) (0.015)
Leverage − 0.027 − 0.027 − 0.117 − 0.117
(0.023) (0.023) (0.078) (0.078)
Age − 0.003 − 0.003 0.022 0.022
(0.007) (0.007) (0.021) (0.021)
Profit 0.706*** 0.706*** − 0.036 − 0.035
(0.075) (0.075) (0.225) (0.225)
Firm FE YES YES YES YES
Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES
Industry x year FE YES YES YES YES
Observations 85,372 85,372 86,346 86,346
R-squared 0.148 0.149 0.147 0.147

Panel B: SEC Customer-supplier-year level sample

Dependent variable Identifying trade credit demand Identifying trade credit supply
Change in trade credit Change in trade credit
[1] [2]

Affected customer 0.024***

(0.009)
Affected supplier 0.021**
(0.010)
Supplier x year FE YES
Customer x year FE YES
Observations 853 1023
R-squared 0.623 0.340

This table reports estimates of the effects of natural disasters on the receivables of the suppliers and payables of the customers of affected firms. Panel A uses the merged
Compustat/Factset Revere sample, whereas Panel B uses the SEC sample. In Panel A, the unit of observation in each regression is a firm-quarter. In Panel B, the unit of
observation is a supplier-customer-year. The dependent variable in columns 1 and 2 of Panel A is the change in receivables, defined as the difference between the ratio
of receivables to sales in quarter t + 4 and t, and in columns 3 and 4 of Panel A is the change in payables, defined as the difference between the ratio of payables to the
cost of goods sold in quarter t + 4 and t. In Panel B, the dependent variable is the change in trade credit, defined as the difference between the amount of accounts
receivable in year t + 1 and t granted by supplier s to firm i scaled by the sales amount of supplier s to firm i. In Panel A columns 1 and 2, the main independent variable
is Supplier of affected firm, which is an indicator variable that equals one if the firm is a supplier of a firm that is impacted by a natural disaster at time t and zero
otherwise, and in columns 3 and 4, is Customer of affected firm, which is an indicator variable that equals one if the firm is a customer of a firm that is impacted by a
natural disaster at time t and zero otherwise. In Panel B columns 1 and 2, the main independent variables are Affected customer, which is an indicator variable that
equals one if a firm’s customer is located in a county that is impacted by a natural disaster in year t and zero otherwise, and Affected supplier, which is an indicator
variable that equals one if a firm’s supplier is located in a county that is impacted by a natural disaster in year t and zero otherwise, respectively. Firm controls include
size, leverage, age, and profitability. All variables are defined in Appendix A. Robust standard errors clustered by firm in Panel A and by customer (supplier) firm in
columns 1 (2) of Panel B are in parentheses. Statistical significance at the 1%, 5%, and 10% level is denoted by ***, **, and *, respectively.

networks increase when one of the firms experiences operating shocks.
Our conceptual framework suggests the mechanisms for why this may be
the case. In the next section, we test these mechanisms by exploiting
cross-sectional differences between firms and their customers and
suppliers.
5. Testing the mechanisms
5.1. Customers’ switching costs
We start by testing the first insight of Implication 1. The propensity
of a firm to switch from a supplier that is likely to deliver inputs late or of
inferior quality should be higher if switching costs are low. Affected
firms’ customers are likely to face lower switching costs if the input is
easy to substitute. In this case, affected firms should increase the supply
of trade credit to a larger extent to maintain their customer relationships
following natural disasters.
In Table 6 Panel A, we start by measuring customers’ switching costs
using a firm’s product market fluidity proxy developed by Hoberg et al.
(2014). Product fluidity measures the availability of close substitutes for
a firm’s product using the product descriptions from a firm’s and its
competitors’ 10-K filings.
Column 1 shows that firms that are affected by natural disasters
extend more trade credit if their product has close substitutes. The
estimated effect is economically significant: going from the bottom
decile to the top decile of the product fluidity proxy increases receiv­
ables by 9%.
According to Implication 2, if affected firms lose market share, their
suppliers’ sales are negatively affected. Therefore, suppliers should
provide more trade credit to the affected firms when the latter have a
high risk of losing their customers because of low switching costs.

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N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 6 Consistent with this insight, column 2 shows that affected firms whose
Customers’ switching costs. product is easy to substitute obtain more trade credit.14 The magnitude
Panel A: Compustat/Factset Revere sample of the effect is similar to that estimated for receivables: going from the
Change in Change in Change in Change in bottom decile to the top decile in product market fluidity is associated
receivables payables receivables payables with a 14% increase in payables.
[1] [2] [3] [4]
We also consider an alternative proxy for customers’ switching costs
Affected − 0.017 − 0.014 0.031** 0.126*** based on the Herfindahl-Hirschman index (HHI) of industry sales. Cus­
(0.017) (0.061) (0.012) (0.035) tomers of firms in concentrated industries are likely to encounter more
Fluidity 0.002 − 0.004
(0.001) (0.004)
difficulties finding alternative suppliers of inputs because there are
Affected*Fluidity 0.004** 0.012* relatively few suppliers of the product. Switching costs should thus be
(0.002) (0.007) higher, resulting in more stable customer relationships. Columns 3 and 4
HHI − 0.002 0.097 of Table 6 show that the increase in trade credit usage is indeed less
(0.029) (0.062)
pronounced when the firms affected by natural disasters are in
Affected*HHI − 0.086* − 0.328***
(0.050) (0.112) concentrated industries. Not only do affected firms extend less trade
Size − 0.021*** − 0.006 − 0.015*** − 0.003 credit to their customers, but also affected firms’ suppliers extend less
(0.006) (0.017) (0.005) (0.015) trade credit. The estimated effects are both statistically and economi­
Leverage − 0.011 − 0.096 − 0.022 − 0.091 cally significant: going from the bottom decile to the top decile of the
(0.025) (0.073) (0.021) (0.070)
HHI is associated with a 4% and 12% decrease in receivables and pay­
Age 0.001 0.008 − 0.005 0.010
(0.008) (0.025) (0.007) (0.021) ables, respectively, following natural disasters.
Profit 0.330*** − 0.228 0.341*** − 0.078 Finally, we also consider that switching costs tend to be fixed and
(0.052) (0.172) (0.047) (0.166) may therefore be less relevant for large customers. Alternative suppliers
Affected customer 0.006 0.004 0.003 − 0.003
should also do their best to attract large customers. According to
(supplier)
(0.004) (0.015) (0.004) (0.013) Implication 1, if large customers indeed have lower switching costs, they
Firm FE YES YES YES YES should receive more trade credit from firms affected by operating
Year-quarter FE YES YES YES YES shocks. We test this implication using the SEC sample that allows us to
State x year FE YES YES YES YES evaluate whether a given affected firm provides more trade credit to
Industry x year FE YES YES YES YES
their large customers than others. Table 6 Panel B shows that this is
Observations 78,176 78,176 93,702 93,702
R-squared 0.132 0.137 0.133 0.136 indeed the case. We classify the sample firms receiving trade credit into
three size groups: Size 25_50, Size 50_75, and Size 75+, which indicate that
Panel B: SEC Customer-supplier-year level sample the firm is in the 25th to 50th, 50th to 75th, or above the 75th percentile
Change in trade credit for total assets. The category with total assets below the 25th percentile
[1]
is the omitted group. Consistent with our hypothesis, we find that firms
Affected supplier − 0.020 with total assets above the 75th percentile experience a statistically
(0.026)
significant increase in trade credit they receive from their affected
Affected supplier*Customer size 25_50 0.038
(0.052) suppliers. This test also indicates why affected firms may use trade credit
Affected supplier*Customer size 50_75 0.024 to increase their customers’ utility from maintaining the relationships:
(0.034) As Giannetti et al. (2021) show, trade credit can allow firms to transfer
Affected supplier*Customer size 75+ 0.048* different amounts of surplus to different customers without being
(0.027)
Customer x year FE YES
sanctioned by antitrust authorities and distorting competition in
Observations 1023 downstream markets.
R-squared 0.341 In sum, the switching costs of affected firms’ customers appear to be
This table reports estimates of the effects of natural disasters on the receivables an important driver of the provision of trade credit for both affected
and payables of firms whose customers face different switching costs. In Panel A, firms and their suppliers, supporting the first two implications of our
the unit of observation is a firm-quarter, using the merged Compustat/Factset framework.
Revere sample. The dependent variables are the changes in receivables (columns
1 and 3) and payables (columns 2 and 4), defined as the difference between the 5.2. Expected disruption
ratio of receivables to sales and the ratio of payables to the cost of goods sold in
quarter t + 4 and t, respectively. In columns 1 and 2, the measure of competitive
According to Implication 1, the propensity of an affected firm’s
environment is the product market fluidity proxy developed by Hoberg et al.
customer to switch supplier also depends on the expected disruption that
(2014). In columns 3 and 4, the measure of competitive environment is the
Herfindahl index (HHI) of the sales in the industry of a firm. The main inde­
late or low-quality input deliveries may cause. Consequently, the
pendent variable is Affected, which is an indicator variable that equals one if a amount of trade credit that a disaster-hit firm must extend for the supply
firm is located in a county that is impacted by a natural disaster in quarter t and chain to survive should be increasing in the expected disruption that the
zero otherwise. Firm controls include size, leverage, age, and profitability. We natural disaster causes for the customer. For the same reasons, according
also control for affected customer (supplier) when using change in receivables to Implication 2, suppliers of affected firms whose ability to deliver the
(payables) as the outcome variable. In Panel B, the unit of observation is a product is less impacted by the natural disaster should extend less trade
supplier-customer-year, using the SEC sample. The dependent variable is the credit to the affected firms.
change in trade credit, defined as the difference between the amount of accounts To evaluate this insight, we conjecture that firms with production
receivable in year t + 1 and t granted by supplier s to firm i scaled by the sales facilities spread out across locations should be less affected by natural
amount of supplier s to firm i. The main independent variable is the interactions
disasters because they should be able to ship their products from plants
between Affected supplier, which is an indicator variable that equals one if a
in other locations. We use Dun & Bradstreet National Establishment
firm’s supplier is located in a county that is impacted by a natural disaster in year
t and zero otherwise, and indicators for size percentiles. All variables are defined Time Series (NETS) and capture the geographic dispersion of a firm’s
in Appendix A. Robust standard errors clustered by firm in Panel A and supplier
in Panel B are in parentheses. Statistical significance at the 1%, 5%, and 10%
14
level is denoted by ***, **, and *, respectively. Table IA.11 shows that the receivables of suppliers increase more when the
affected firms produce products that are easy to substitute, supporting Impli­
cation 2 that suppliers accommodate liquidity provision.

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N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 7 Table 8
Expected disruption. Firm reputation.
Change in Change in Change in Change in Change in Change Change in Change in
receivables payables receivables payables receivables in receivables payables
[1] [2] [3] [4] [1] payables [3] [4]
[2]
Affected 0.029** 0.113*** 0.029** 0.126***
(0.012) (0.037) (0.012) (0.039) Affected 0.045** 0.152** 0.020*** 0.086***
Number of states 0.001 0.002* (0.020) (0.060) (0.008) (0.025)
(0.000) (0.001) Relationship length − 0.002* − 0.006
Affected*Number − 0.001** − 0.003** (0.001) (0.004)
of states Affected*Relationship − 0.008* − 0.023*
(0.000) (0.001) length
High inventory 0.001 − 0.056*** (0.005) (0.013)
(0.007) (0.020) Superstar 0.046** 0.151**
Affected*High − 0.024* − 0.105*** (0.018) (0.074)
inventory Affected*Superstar − 0.039** − 0.154***
(0.014) (0.039) (0.018) (0.052)
Size − 0.016*** − 0.005 − 0.015*** − 0.006 Size − 0.016*** − 0.004 − 0.016*** − 0.004
(0.005) (0.015) (0.005) (0.015) (0.005) (0.015) (0.005) (0.015)
Leverage − 0.022 − 0.092 − 0.022 − 0.091 Leverage − 0.022 − 0.092 − 0.021 − 0.089
(0.021) (0.070) (0.021) (0.070) (0.021) (0.070) (0.021) (0.070)
Age − 0.006 0.007 − 0.006 0.011 Age − 0.005 0.012 − 0.006 0.009
(0.007) (0.021) (0.007) (0.021) (0.007) (0.021) (0.007) (0.021)
Profit 0.342*** − 0.074 0.341*** − 0.079 Profit 0.342*** − 0.076 0.341*** − 0.078
(0.047) (0.166) (0.047) (0.166) (0.047) (0.166) (0.047) (0.166)
Affected customer 0.003 − 0.003 0.003 − 0.003 Affected customer 0.003 − 0.003 0.003 − 0.003
(supplier) (supplier)
(0.004) (0.013) (0.004) (0.013) (0.004) (0.013) (0.004) (0.013)
Firm FE YES YES YES YES Firm FE YES YES YES YES
Year-quarter FE YES YES YES YES Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES State x year FE YES YES YES YES
Industry x year FE YES YES YES YES Industry x year FE YES YES YES YES
Observations 93,702 93,702 93,702 93,702 Observations 93,702 93,702 93,702 93,702
R-squared 0.133 0.136 0.133 0.136 R-squared 0.133 0.136 0.133 0.136

This table reports estimates of the effects of natural disasters on the receivables
and payables of firms with varying degrees of expected disruption. The unit of
observation in each regression is a firm-quarter. The dependent variables are
changes in receivables (columns 1 and 3) and payables (columns 2 and 4),
defined as the difference between the ratio of receivables to sales and the ratio of
payables to the cost of goods sold in quarter t + 4 and t, respectively. Number of
states indicates the number of states in which a firm operates. High inventory is an
indicator variable that equals one if the firm has an above median level of in­
ventories scaled by assets and zero otherwise. The main independent variable is
Affected, which is an indicator variable that equals one if a firm is located in a
county that is impacted by a natural disaster in quarter t and zero otherwise.
Firm controls include size, leverage, age, and profitability. We also control for
affected customer (supplier) when using change in receivables (payables) as the
outcome variable. All variables are defined in Appendix A. Robust standard
errors clustered by firm are in parentheses. Statistical significance at the 1%, 5%,
and 10% level is denoted by ***, **, and *, respectively.
This table reports estimates of the effects of natural disasters on the receivables
and payables of firms with different reputation. The unit of observation in each
regression is a firm-quarter. The dependent variables are changes in receivables
(columns 1 and 3) and payables (columns 2 and 4), defined as the difference
between the ratio of receivables to sales and the ratio of payables to the cost of
goods sold in quarter t + 4 and t, respectively. Relationship length is the average
length of a treated firm’s relationships with its customers, measured from when
a firm and each of its customers are first reported in Factset Revere. Superstar is
an indicator that equals one if the firm’s market value is in the top 1% of the
industry and zero otherwise. The main independent variable is Affected, which is
an indicator variable that equals one if a firm is located in a county that is
impacted by a natural disaster in quarter t and zero otherwise. Firm controls
include size, leverage, age, and profitability. We also control for affected
customer (supplier) when using change in receivables (payables) as the outcome
variable. All variables are defined in Appendix A. Robust standard errors clus­
tered by firm are in parentheses. Statistical significance at the 1%, 5%, and 10%
level is denoted by ***, **, and *, respectively.

operations by counting the number of states in which a firm operates. In

columns 1 and 2 of Table 7, the negative and significant coefficients on
the interactions between the number of states in which a firm operates
and the affected firm dummy indicate that the increase in trade credit
usage is significantly smaller for firms that are likely to have been less
disrupted by natural disasters thanks to more geographically dispersed
operations. A one-standard-deviation increase in the number of states in
which a firm operates decreases the accounts receivable and accounts
payables ratios by 2.36% and 8.32%, respectively.
We also consider that firms with more inventories may have finished
products ready to ship to their customers, thus limiting backlogs and
disruption for downstream firms in expectation. These firms and their
suppliers would therefore have to extend less trade credit for the supply
chain to remain stable after negative operating shocks occur. Columns 3
and 4 of Table 7 show that in accordance with this prediction of our
conceptual framework, firms with a ratio of inventory to total assets
above the median experience a 4% and 20.59% smaller increase in re­
ceivables and payables, respectively, following natural disasters.
In addition, the expected disruption may also be lower when firms
have developed a strong reputation with their customers. A strong
reputation is likely to be associated with relationship length, which may
also reveal high switching costs for customers that have tailored their
production processes to those suppliers for a long time.15 Both effects
would go in the direction of decreasing the need to transfer surplus to
the customer and the provision of the trade credit to the company
experiencing operating shocks. Another proxy for reputation is linked to
the superstar status of a company. The firms with the highest market
capitalization in an industry are often considered superstars (Autor
et al., 2020; Gutierrez and Philippon, 2019). These firms are also harder
to substitute for more reliable suppliers. Thus, we expect that they
provide less trade credit when they are hit by operating shocks. Table 8
shows that reputable firms indeed experience a smaller increase in
15
We measure relationship length considering the time since a relationship
was first reported in Factset Revere. The variable is therefore truncated at the
beginning of the sample.

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N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 9 Table 10
Natural disasters and affected firms’ dependence on customers. Natural disasters and trade credit along the supply chain.
Change in Change in Change in Change in Change in Change in
receivables payables receivables payables receivables receivables
[1] [2] [3] [4] [1] [2]

Affected 0.009 0.051** 0.003 − 0.004 Supplier of affected firm 0.012* 0.001
(0.006) (0.020) (0.010) (0.006) (0.007) (0.007)
Relative size 0.001 − 0.002 Relative size 1_2 − 0.002
(0.001) (0.004) (0.002)
Affected*Relative 0.007* 0.019* Relative size 0_1 − 0.001
size (0.001)
(0.004) (0.011) Supplier of affected firm*Relative size 0.007*
Major customer 0.012* 0.004 1_2
(0.006) (0.004) (0.004)
Affected*Major 0.054** 0.022** Supplier of affected firm*Relative size 0.007**
customer 0_1
(0.021) (0.011) (0.004)
Size − 0.015*** − 0.005 − 0.016*** − 0.009*** Major customer 1_2 0.014**
(0.005) (0.015) (0.005) (0.003) (0.006)
Leverage − 0.022 − 0.091 − 0.022 − 0.013 Major customer 0_1 0.001
(0.021) (0.070) (0.021) (0.010) (0.013)
Age − 0.006 0.009 − 0.005 0.004 Supplier of affected firm*Major 0.025*
(0.007) (0.021) (0.007) (0.004) customer 1_2
Profit 0.341*** − 0.076 0.340*** − 0.010 (0.015)
(0.048) (0.166) (0.047) (0.025) Supplier of affected firm*Major 0.081**
Affected customer 0.004 − 0.001 0.003 0.001 customer 0_1
(supplier) (0.040)
(0.004) (0.012) (0.004) (0.003)
Firm FE YES YES YES YES Firm controls YES YES
Year-quarter FE YES YES YES YES Firm FE YES YES
State x year FE YES YES YES YES Year-quarter FE YES YES
Industry x year FE YES YES YES YES State x year FE YES YES
Observations 93,702 93,702 93,702 93,702 Industry x year FE YES YES
R-squared 0.133 0.136 0.133 0.122 Observations 85,372 85,372
R-squared 0.149 0.149
This table reports estimates of the effects of natural disasters on the receivables
and payables of affected firms that depend on their customers to different ex­ This table reports estimates of the effects of natural disasters on the receivables
tents. The unit of observation in each regression is a firm-quarter. The dependent of the suppliers of affected firms. The unit of observation in each regression is a
variables are the changes in receivables (columns 1 and 3) and payables (col­ firm-quarter. The dependent variable is the change in receivables, defined as the
umns 2 and 4), defined as the difference between the ratio of receivables to sales difference between the ratio of receivables to sales. In all columns, the main
and the ratio of payables to the cost of goods sold in quarter t + 4 and t, independent variable is Supplier of affected firm, which is an indicator variable
respectively. In columns 1 and 2, the measure of dependence is Relative size, that equals one if the firm is a supplier of a firm that is impacted by a natural
calculated as the natural logarithm of the affected firm’s customers’ average size disaster at time t and zero otherwise. In column 1, the cross-sectional variable is
scaled by its own size. In columns 3 and 4, the measure of dependence is Major Relative size, calculated as the natural logarithm of the average size of firm’s
customer, which is an indicator variable that equals one if the firm reports a customers scaled by the firm’s size. Relative size 1_2 considers the relative size of
major customer in its financial statements and zero otherwise. The main inde­ the affected firms and their suppliers. Similarly, Relative size 0_1 considers the
pendent variable is Affected, which is an indicator variable that equals one if a relative size of the affected firms and their customers. In column 2, the cross-
firm is located in a county that is impacted by a natural disaster in quarter t and sectional variable is Major customer. Major customer 1_2 is an indicator variable
zero otherwise. Firm controls include size, leverage, age, and profitability. We that equals one if the supplier of an affected firm reports the affected firm as a
also control for affected customer (supplier) when using change in receivables major customer and zero otherwise. Similarly, Major customer 0_1 is an indicator
(payables) as the outcome variable. All variables are defined in Appendix A. variable that equals one if the affected firm reports one of its customers as a
Robust standard errors clustered by firm are in parentheses. Statistical signifi­ major customer. Firm controls include size, leverage, age, profitability, and
cance at the 1%, 5%, and 10% level is denoted by ***, **, and *, respectively. whether the firm is affected. All variables are defined in Appendix A. Robust
standard errors clustered by firm are in parentheses. Statistical significance at
the 1%, 5%, and 10% level is denoted by ***, **, and *, respectively.

receivables and payables following natural disasters, according to both

proxies.
Overall, the cross-sectional evidence on affected firms’ receivables in
Subsections 5.1 and 5.2 provides evidence in support of Implication 1.
Furthermore, the evidence that an affected firm’s payables increase
more when its customers have low switching costs and high expected
disruption supports Implication 2 that suppliers’ trade credit provision
depends on the affected firm’s demand for liquidity, which is in turn
determined by the characteristics of its customers.
5.3. Importance of the production network relationships
The analysis of the cross-sectional effects so far has taken the point of
view of the customers of an affected firm. In this subsection, we evaluate
the insight of Implication 2 that trade credit provision by the affected
firm and its suppliers will depend on how much they have to lose from
the collapse of the supply chain.
First, we take into account that preserving the stability of the supply
chain may be particularly important for firms that depend, to a larger
extent, on their customers and suppliers. Table 9 explores whether
affected firms that are more dependent on a customer do more to pre­
serve the relationship following negative shocks. In columns 1 and 2, we
measure a firm’s dependence on its customers using the size of the
customer relative to the supplier. This proxy, commonly used in the
literature, captures that a firm’s loss from breaking a relationship in­
creases more than proportionally with the size of the buyer relative to
the seller (Klein et al., 1978; Williamson 1979; Chipty and Snyder 1999;
Inderst and Wey 2007) because large customers are particularly difficult
to replace.
In columns 3 and 4, a firm’s dependence on its customers is measured
using Compustat Customer Segment Files. The FASB regulation requires
firms to report customers comprising at least 10% of their sales. Our
measure of dependence, Major customer, is an indicator variable that

12
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

equals one if the firm reports a major customer in the financial state­ Table 11
ments and zero otherwise. Financial constraints and trade credit.
According to both definitions, in columns 1 and 3, we observe that Panel A: Financial constraint proxy - market capitalization below the median
after being hit by a natural disaster, firms that are more dependent on Subsample Constrained firms Unconstrained firms
their customers provide more trade credit. In addition, in columns 2 and Dependent Change in Change in Change in Change in
variable receivables payables receivables payables
4, we find that firms that are highly dependent on their customers
[1] [2] [3] [4]
receive more trade credit from their suppliers when they are affected by
natural disasters. Both definitions of customer dependence give Affected 0.054* 0.281** 0.018** 0.056***
(0.033) (0.116) (0.008) (0.021)
economically significant estimates: going from the bottom decile to the Percentage of 0.037 0.121 0.003 − 0.022
top decile of the customer relative size increases receivables and pay­ constrained
ables by 10.35% and 33.05%, respectively, while having a major suppliers
customer increases receivables and payables by 10% and 5%, (0.051) (0.140) (0.009) (0.022)
Affected* − 0.249* − 0.522** − 0.035 − 0.101
respectively.
Percentage of (0.141) (0.222) (0.030) (0.068)
Second, Table 10 focuses on proxies for the suppliers’ stake in the constrained
production network and examines the changes in receivables of the suppliers
affected firms’ suppliers. We consider how dependent the suppliers are Size − 0.053*** 0.028 − 0.019*** − 0.023
on the affected firm using the same proxies as in Table 9. (0.020) (0.067) (0.005) (0.016)
Leverage 0.045 − 0.344* − 0.025 − 0.069
We explore how a firm’s trade credit provision varies when a direct
(0.053) (0.199) (0.022) (0.069)
customer is affected by a natural disaster depending not only on the Age − 0.046 − 0.117 0.003 0.038**
dependence of the firm on the direct customer, but also on the depen­ (0.036) (0.135) (0.006) (0.017)
dence of the direct customer on its own customers. The receivables of Profit 0.307*** 0.239 0.371*** − 0.203
(0.076) (0.243) (0.066) (0.191)
suppliers of firms affected by natural disasters increase to a larger extent
Affected customer 0.014 − 0.053 0.001 0.015
when the suppliers are highly dependent on the affected firms and when (supplier)
the affected firms are heavily dependent on their own customers. We (0.020) (0.046) (0.004) (0.011)
draw similar conclusions whether we measure customer dependence Firm FE YES YES YES YES
using Relative size (column 1) or Major customer (column 2). The esti­ Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES
mated coefficients are not only statistically but also economically sig­
Industry x year FE YES YES YES YES
nificant: in column 1, a one-standard-deviation increase in the size of the Observations 18,141 18,141 74,748 74,748
affected firms relative to their suppliers and in the size of the customers R-squared 0.235 0.270 0.165 0.145
relative to affected firms increases the receivables of the affected firms’
suppliers by 3.27% and 2.58%, respectively. In column 2, the receiv­ Panel B: Financial constraint proxy - no bond rating
Subsample Constrained firms Unconstrained firms
ables of the affected firms’ suppliers increase by 4.17% and 13.5% when Dependent Change in Change in Change in Change in
the suppliers report the affected firm as a major customer and when variable receivables payables receivables payables
affected firms report one of their customers as major, respectively. [1] [2] [3] [4]
Overall, this evidence supports Implication 2′s insight that trade Affected 0.066*** 0.192** 0.036* 0.075*
credit provision following operating shocks depends on the firms’ stake (0.025) (0.078) (0.021) (0.043)
in the production network survival. Percentage of 0.023* − 0.036 0.003 − 0.025
constrained
suppliers
6. Financial constraints and the instability of supply chains (0.013) (0.036) (0.009) (0.023)
Affected* − 0.090* − 0.235** − 0.066 − 0.038
Implication 3 states that firms can extend more trade credit only if Percentage of (0.052) (0.116) (0.042) (0.094)
they or their suppliers are not financially constrained. For firms with constrained
suppliers
high financing costs, providing cheap financing to customers is too Size − 0.018** 0.005 − 0.020*** − 0.087***
costly. Consequently, the production network may collapse if the (0.007) (0.019) (0.006) (0.024)
affected firm’s suppliers are also financially constrained and unable to Leverage − 0.023 − 0.128 − 0.026 − 0.007
facilitate the liquidity provision by extending payment terms. (0.030) (0.096) (0.021) (0.071)
Age − 0.014 − 0.007 0.013 0.046*
To evaluate the effects of financial constraints on trade credit flows
(0.009) (0.030) (0.011) (0.027)
and supply chain survival, we start by testing to what extent the trade Profit 0.349*** 0.168 0.278*** − 1.483***
credit provision of financially constrained firms affected by a natural (0.055) (0.185) (0.072) (0.286)
disaster indeed depends on the financial conditions of their suppliers. In Affected 0.000 − 0.001 0.005 0.015
Table 11 Panel A, we consider as relatively more financially constrained customer
(supplier)
firms with size (market capitalization) below the median; in Panel B, we
(0.007) (0.019) (0.004) (0.012)
perform the same tests as in Panel A by considering firms without a Firm FE YES YES YES YES
credit rating as relatively more financially constrained. Year-quarter FE YES YES YES YES
Columns 1 and 2 of Panel A consider subsamples of financially State x year FE YES YES YES YES
Industry x year YES YES YES YES
constrained firms and show that affected firms that are financially
FE
constrained experience statistically significant increases in account Observations 59,200 59,200 34,096 34,096
payables and receivables. However, this effect decreases in the per­ R-squared 0.151 0.164 0.173 0.172
centage of suppliers that are financially constrained and trade credit
This table reports estimates of the effects of natural disasters on firms’ receiv­
flows may even drop if firms are associated with a large proportion of
ables and payables using different measures of financial constraints for firms and
constrained suppliers. Results are qualitatively similar in Panel B when their suppliers. In Panel A, we classify a firm and its suppliers as financially
we consider firms without a credit rating as financially constrained and unconstrained if their size (measured by market capitalization) is above the
repeat the same tests as in Panel A. median. In Panel B, we classify a firm and its suppliers as financially uncon­
Columns 3 and 4 of both panels estimate the same specifications as in strained if it has a bond rating. Since firms report several suppliers, we calculate
columns 1 and 2, but in a subsample of firms that are financially un­ the percentage of suppliers that are financially constrained. The unit of obser­
constrained. These firms’ receivables increase following a natural vation in each regression is a firm-quarter. The dependent variables are the

13
N. Ersahin et al.
changes in receivables (columns 1 and 3) and payables (columns 2 and 4),
defined as the difference between the ratio of receivables to sales and the ratio of
payables to the cost of goods sold in quarter t + 4 and t, respectively. In columns
1 and 2, we consider the subsample of financially constrained firms. In columns
3 and 4, we consider the subsample of financially unconstrained firms. Affected is
an indicator variable that equals one if a firm is located in a county that is
impacted by a natural disaster in quarter t and zero otherwise. Firm controls
include size, leverage, age, and profitability. We also control for affected
customer (supplier) when using change in receivables (payables) as the outcome
variable. All variables are defined in Appendix A. Robust standard errors clus­
tered by firm are in parentheses. Statistical significance at the 1%, 5%, and 10%
level is denoted by ***, **, and *, respectively.
disaster, indicating that they extend more trade credit irrespective of the
financial conditions of the suppliers. In column 3, not only is the coef­
ficient on Affected*Percentage of constrained suppliers statistically insig­
nificant but also the point estimate is smaller than that in column 1,
supporting our conjecture that the financial conditions of suppliers
matter less for firms with low financing costs.
In column 4, we also observe a (small) increase in the payables of
financially unconstrained firms, suggesting that suppliers continue to
favor the provision of trade credit even though the estimated effect is
smaller than that in column 2. The finding is consistent with the fact that
in this subsample, affected firms have smaller funding costs. The coef­
ficient on the interaction term between affected and the percentage of
financially constrained suppliers is not statistically significant, even
though it is negative as we would expect.
Overall, the results in Table 11 show that the financial constraints of
a firm and its suppliers constitute an important factor limiting the pro­
vision of trade credit when operating shocks occur. Next, we analyze
whether the provision of trade credit indeed helps preserve the stability
of supply chains. More specifically, we explore whether the customers of
affected firms are more likely to terminate relationships with the
affected firms following natural disasters, when financial constraints
prevail in the supply chain.
In Table 12 Panel A, we show that firms affected by natural disasters
appear to lose customers when both the affected firm and a larger pro­
portion of their suppliers are financially constrained. We know from
Table 11 that these firms are not able to provide more trade credit to
their customers when they are hit by a natural disaster. In columns 1 and
3, we consider the subsamples of financially constrained firms, defined
again using either market capitalization below the median or the lack of
a bond rating. The parameter estimates are not only statistically, but also
economically significant. A standard deviation increase in the percent­
age of constrained suppliers leads the affected firms to lose 4.12% and
1.58% of their customers using the market capitalization and bond
rating measures as proxies for financial constraints, respectively; a
sizeable number considering that on average, in our sample, firms
experience a yearly increase in the number of customers of about 2%.
In columns 2 and 4, we consider subsamples of financially uncon­
strained firms, defined as above. Being able to offer trade credit, these do
not lose customers after experiencing natural disasters regardless of the
financial conditions of their suppliers, as indicated by the statistically
insignificant coefficient on the interaction Affected*Percentage of con­
strained suppliers. Also in this case, estimates are qualitatively and
quantitatively invariant when we use different proxies for financial
constraints.
In Panel B, we take the perspective of the customers of affected firms.
We ask whether the customers add new suppliers in the industry of the
affected firms to avoid bottlenecks. Firms could also add suppliers if they
want to sever the relationship with the affected firms. We observe that
the customers of affected firms start new relationships with the affected
firms’ competitors only if the affected firms are financially constrained
(columns 1 and 3) and have a large proportion of financially constrained
suppliers. In columns 2 and 4, we consider the subsamples of
14
Journal of Financial Economics 155 (2024) 103830
unconstrained firms and find no evidence that the customers of affected
firms seek new suppliers, regardless of the financial conditions of
affected firms’ suppliers. These findings indicate that the financial
conditions of suppliers matter only for affected firms with high funding
costs, as is consistent with our conceptual framework.
Overall, the evidence in this section supports the mechanism behind
our conceptual framework that trade credit helps preserve supply chain
stability when negative operating shocks occur. The financial conditions
of suppliers play a crucial role in the provision of trade credit and the
resulting stability of the supply chain.
Importantly, the provision of trade credit affects not only the sta­
bility of the affected firms’ customer relationships, but also their prof­
itability and sales. Table 13 distinguishes between subsamples of
constrained and unconstrained firms, following the same structure as
Tables 11 and 12, and provides evidence that the increase in trade credit
usage following natural disasters helps to maintain the sales and prof­
itability of affected firms. In particular, we observe a negative and sig­
nificant coefficient on the interaction Affected*Percentage of constrained
suppliers only in the subsamples of financially constrained firms (col­
umns 1 and 3), indicating that the sales and profitability of affected
firms drop only when both the affected firms and their suppliers are
financially constrained, that is, when firms are unable to obtain and
offer more trade credit and thus lose customers. We do not detect any
negative effects of natural disasters on the sales and profitability of
affected firms if they are financially unconstrained (columns 2 and 4),
regardless of their suppliers’ ability to provide liquidity.
In Table IA.12, we also consider the effects on the suppliers of the
affected firm. Our framework implies that unconstrained suppliers are
willing to extend trade credit to the affected firms because their sales
and profits would also drop if their direct customers lost their own
customers. In columns 1 and 3 of Panels A and B, we consider the sub­
sample of constrained firms. The estimates show that regardless of the
definition of financial constraints we use, the sales and profits of the
affected firms’ suppliers drop only when their affected customers are
financially constrained and are likely to have been unable to extend
sufficient trade credit to preserve their customer relationships. As we
would expect, financially unconstrained firms, being able to facilitate
trade credit flows, do not experience a drop in sales when their cus­
tomers experience natural disasters even if their customers are finan­
cially constrained.
Taken together, not only are these results consistent with the idea
that trade credit enhances the stability of production networks when
operating shocks affect a firm in the network but also suggest that firms
affected by negative shocks can preserve their profitability thanks to
trade credit flows.
7. Extensions
7.1. Natural disasters and supplier choice
The analysis so far has shown that suppliers with deep pockets can
provide insurance. Since suppliers’ financial health can benefit a firm’s
performance, firms should pay close attention to the financial conditions
of the suppliers (Titman, 1984; Banerjee et al., 2008). Specifically, we
expect that firms that have the most to lose from negative realizations of
operating risk seek the reliability provided by suppliers with financial
flexibility. Table 14 provides some evidence that this is the case. For
each firm, we consider the average size of the suppliers in a given year
and industry. Given that larger suppliers are more likely to be financially
unconstrained, we expect that firms that are more concerned about the
negative consequences of operating shocks would be more likely to work
with those suppliers.
Consistent with our theoretical framework and earlier findings, we
consider firms that are highly dependent on their customers and exposed
to natural disasters as particularly concerned about the negative con­
sequences of operating shocks. We thus test whether on average they are
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 12
Financial constraints and changes in customer-supplier relationships.
Panel A: Dependent variable - Change in number of customers for the affected firms
Financial constraint proxy Market capitalization below the median No bond rating
Subsample Constrained Firms Unconstrained Firms Constrained Firms Unconstrained Firms
[1] [2] [3] [4]

Affected 0.013 0.001 0.014 0.002

(0.013) (0.006) (0.014) (0.016)
Percentage of constrained suppliers − 0.033 − 0.005 0.012 − 0.004
(0.040) (0.016) (0.016) (0.017)
Affected* − 0.205* − 0.030 − 0.049* − 0.002
Percentage of constrained suppliers (0.106) (0.037) (0.029) (0.032)
Size 0.016 0.015** 0.004 0.046***
(0.015) (0.007) (0.007) (0.012)
Leverage 0.042 0.003 0.005 − 0.010
(0.038) (0.023) (0.023) (0.036)
Age − 0.040 − 0.066*** − 0.062*** − 0.063***
(0.035) (0.012) (0.013) (0.022)
Profit 0.001 0.106** − 0.010 0.226***
(0.039) (0.044) (0.033) (0.066)
Firm FE YES YES YES YES
Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES
Industry x year FE YES YES YES YES
Observations 14,621 67,355 51,499 30,815
R-squared 0.503 0.276 0.303 0.376

Panel B: Dependent variable - Change in number of new suppliers for the affected firms’ customers
Financial constraint proxy Market capitalization below the median No bond rating
Subsample Constrained Firms Unconstrained Firms Constrained Firms Unconstrained Firms
[1] [2] [3] [4]

Customer of affected firm − 0.025 0.006 − 0.032 0.035

(0.016) (0.011) (0.022) (0.027)
Percentage of constrained suppliers − 0.012 − 0.024 0.021 − 0.027
(0.039) (0.030) (0.020) (0.025)
Customer of affected firm* 0.097** 0.091 0.077* − 0.025
Percentage of constrained suppliers (0.049) (0.071) (0.044) (0.047)
Size − 0.002 − 0.009 − 0.005 − 0.007
(0.014) (0.006) (0.007) (0.006)
Leverage 0.005 − 0.034 − 0.038 − 0.042*
(0.058) (0.024) (0.029) (0.024)
Age − 0.019 − 0.001 − 0.014 0.012
(0.032) (0.011) (0.013) (0.012)
Profit − 0.252 0.061 0.059 0.039
(0.158) (0.063) (0.076) (0.066)
Firm FE YES YES YES YES
Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES
Industry x year FE YES YES YES YES
Observations 19,514 84,601 61,551 76,178
R-squared 0.400 0.172 0.213 0.19

This table reports estimates of the effects of natural disasters on firms’ number of customers (Panel A) and customers’ number of new suppliers (Panel B). In columns 1
and 2, we classify a firm as financially unconstrained if its size (measured by market capitalization) is above the median. In columns 3 and 4, we classify a firm as
financially unconstrained if it has a bond rating. Since firms report several suppliers, we calculate the percentage of suppliers that are financially constrained. The unit
of observation in each regression is a firm-quarter. In columns 1 and 3, we consider the subsample of financially constrained firms. In columns 2 and 4, we consider the
subsample of financially unconstrained firms. The main independent variables in Panels A and B are Affected, which is an indicator variable that equals one if a firm is
located in a county that is impacted by a natural disaster in quarter t and zero otherwise, and Customer of affected firm, which is an indicator variable that equals one if
the firm is a customer of a firm that is impacted by a natural disaster at time t and zero otherwise, respectively. Firm controls include size, leverage, age, and prof­
itability. All variables are defined in Appendix A. Robust standard errors clustered by firm are in parentheses. Statistical significance at the 1%, 5%, and 10% level is
denoted by ***, **, and *, respectively.

more likely to have large suppliers. We control for the industry of the
suppliers (as firm size differs systematically across industries) as well as
for the firm’s industry. Since managers who have recently experienced
natural disasters may consider particularly salient the risk that such
shocks occur in the future (Dessaint and Matray, 2017), we measure
exposure to natural disasters using an indicator for whether natural
disasters occurred over the previous five years.16
16
Since the SHELDUS data start in 1960 we do not lose the initial years of our
sample.
It appears that firms exposed to operating shocks that are dependent
on their customers tend to be associated with larger suppliers. Results
are consistent when we use either of our proxies for customer depen­
dence. Moreover, the negative and significant coefficients on Size*Cus­
tomer dependence*Disaster in last 5 years show that indeed smaller and
consequently more financially constrained firms that are highly
dependent on their customers and more exposed to natural disasters
tend to have larger suppliers. This result suggests that financially con­
strained firms appreciate the insurance that larger suppliers can offer to
a greater extent.

15
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 13
Natural disasters, financial constraints, and affected firms’ performance.
Panel A: Dependent variable - Change in ROA
Financial constraint proxy Market capitalization below the median No bond rating
Subsample Constrained Firms Unconstrained Firms Constrained Firms Unconstrained Firms
[1] [2] [3] [4]

Affected 0.001 0.001 0.003 0.000

(0.003) (0.001) (0.002) (0.002)
Percentage of constrained suppliers 0.002 0.001 − 0.002* − 0.001*
(0.003) (0.001) (0.001) (0.001)
Affected* − 0.019*** 0.002 − 0.005* 0.001
Percentage of constrained suppliers (0.007) (0.003) (0.003) (0.003)
Size − 0.004*** − 0.003*** − 0.003*** − 0.004***
(0.001) (0.000) (0.001) (0.001)
Leverage 0.004 0.005*** 0.005** 0.008***
(0.005) (0.002) (0.002) (0.002)
Age − 0.001 0.001 0.001 0.000
(0.003) (0.001) (0.001) (0.001)
Profit − 0.146*** − 0.199*** − 0.166*** − 0.180***
(0.009) (0.008) (0.007) (0.013)
Firm FE YES YES YES YES
Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES
Industry x year FE YES YES YES YES
Observations 18,141 74,748 59,200 34,096
R-squared 0.311 0.271 0.235 0.329

Panel B: Dependent variable - Change in log sales

Financial constraint proxy Market capitalization below the median No bond rating
Subsample Constrained Firms Unconstrained Firms Constrained Firms Unconstrained Firms
[1] [2] [3] [4]

Affected 0.022 0.001 0.032*** − 0.016

(0.014) (0.005) (0.010) (0.010)
Percentage of constrained suppliers − 0.003 0.010 − 0.016* − 0.003
(0.023) (0.007) (0.009) (0.009)
Affected* − 0.093** 0.017 − 0.043** 0.021
Percentage of constrained suppliers (0.045) (0.026) (0.020) (0.019)
Size − 0.076*** − 0.080*** − 0.065*** − 0.088***
(0.009) (0.005) (0.005) (0.008)
Leverage − 0.055** − 0.032** − 0.039** − 0.030
(0.022) (0.014) (0.015) (0.020)
Age − 0.046** − 0.015** − 0.032*** − 0.023**
(0.020) (0.006) (0.008) (0.011)
Profit − 0.265*** − 0.401*** − 0.323*** − 0.169***
(0.038) (0.045) (0.033) (0.050)
Firm FE YES YES YES YES
Year-quarter FE YES YES YES YES
State x year FE YES YES YES YES
Industry x year FE YES YES YES YES
Observations 18,141 74,748 59,200 34,096
R-squared 0.415 0.380 0.345 0.461

This table reports estimates of the effects of natural disasters on firms’ ROA (Panel A) and Sales (Panel B) using different measures of financial constraints for firms and
their suppliers. In columns 1 and 2, we classify a firm as financially unconstrained if its size (measured by market capitalization) is above the median. In columns 3 and
4, we classify a firm as financially unconstrained if it has a bond rating. Since firms report several suppliers, we calculate the percentage of suppliers that are financially
constrained. The unit of observation in each regression is a firm-quarter. The dependent variables are the change in ROA and the natural logarithm of sales, defined as
the difference between the value in quarter t + 4 and t. In columns 1 and 3, we consider the subsample of financially constrained firms. In columns 2 and 4, we consider
the subsample of financially unconstrained firms. The main independent variable, Affected, is an indicator variable that equals one if a firm is located in a county that is
impacted by a natural disaster in quarter t and zero otherwise. Firm controls include size, leverage, age, and profitability. All variables are defined in Appendix A.
Robust standard errors clustered by firm are in parentheses. Statistical significance at the 1%, 5%, and 10% level is denoted by ***, **, and *, respectively.

16
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

Table 14 Table 15
Natural disasters and supplier choice. The impact of supply chain risk on firms’ receivables and payables.
Measure of dependence on Relative size Major customer Change in receivables Change in payables
customer [1] [2]
Avg supplier size by Avg supplier size by
High SCRisk 0.006* 0.024**
industry industry
(0.003) (0.012)
[1] [2]
Size − 0.018*** − 0.045**
Size − 0.026 − 0.017 (0.006) (0.019)
(0.021) (0.016) Leverage 0.001 − 0.101
Disaster in last 5 years − 0.341*** − 0.082 (0.027) (0.082)
(0.107) (0.070) Age 0.004 0.023
Size*Disaster in last 5 years 0.039*** 0.014 (0.007) (0.021)
(0.013) (0.010) Profit 0.373*** 0.002
Customer dependence − 0.028* − 0.101* (0.063) (0.210)
(0.016) (0.056) Firm FE YES YES
Customer dependence*Size 0.006** 0.022** Year-Quarter FE YES YES
(0.002) (0.009) State x year FE YES YES
Customer dependence*Disaster in 0.067*** 0.171* Industry x year FE YES YES
last 5 years Observations 56,367 56,367
(0.021) (0.098) R-squared 0.165 0.149
Size*Customer dependence* − 0.007** − 0.028*
Disaster in last 5 years (0.003) (0.014) This table reports the effects of supply chain risk on firms’ receivables and
Leverage 0.057 0.053 payables. The unit of observation is a firm-quarter. The dependent variables are
(0.070) (0.056) changes in receivables (column 1) and payables (column 2), defined as the
Profit − 0.014 − 0.032 difference between the ratio of receivables to sales and the ratio of payables to
(0.044) (0.036) the cost of goods sold in quarter t + 4 and t, respectively. The main independent
Age − 0.141*** − 0.115*** variable is High SCRisk, which is an indicator variable that equals one if the
(0.030) (0.023) firm’s supply chain risk is in the top quintile and zero otherwise, according to the
Firm FE YES YES
supply chain risk measure in Ersahin et al. (2024). Firm controls include size,
Industry x year FE YES YES
Supplier Industry x year FE YES YES
leverage, age, and profitability in quarter t. All variables are defined in Appendix
Observations 180,815 235,989 A. Robust standard errors clustered by firm are in parentheses. Statistical sig­
R-squared 0.606 0.613 nificance at the 1%, 5%, and 10% level is denoted by ***, **, and *, respectively.

This table reports estimates of the effects of natural disasters on firms’ supplier
choice. The unit of observation is a firm-supplier industry-year. The dependent
variable Avg supplier size by industry is the average size of the suppliers in a given
year and industry for the firm. Size is the firm’s natural logarithm of total assets.
Disaster in last 5 years is an indicator variable that equals one if the firm is in a
county that had a natural disaster in the last 5 years and zero otherwise. We
measure a firm’s Customer dependence using two measures: relative size (column
1) and major customer (column 2). Relative size is the natural logarithm of the
affected firm’s customers’ average size scaled by its own size; Major customer is
an indicator variable that equals one if the firm reports a major customer in its
financial statements and zero otherwise. Firm controls include leverage, age,
and profitability. All variables are defined in Appendix A. Robust standard errors
clustered by firm are in parentheses. Statistical significance at the 1%, 5%, and
10% level is denoted by ***, **, and *, respectively.
after liquidity shortfalls that do not impair its ability to produce. In this
case, customers have incentives to renounce some trade credit and
accelerate payments to avoid incurring switching costs. We thus expect
that firms experiencing liquidity shortfalls extend less trade credit to
their customers, propagating downstream the liquidity shock.
Table IA.13 shows that this is indeed the case. Firms that were associated
with Lehman extend less trade credit to their customers after Lehman’s
failure, consistent with the results of previous literature on liquidity
shocks (Costello, 2020). Overall, these results provide evidence for the
external validity of our findings and further support the mechanisms
behind our framework.

7.2. Other operating shocks and comparison with liquidity shocks 8. Conclusions

We expect trade credit flows to increase when operating difficulties
for a firm in the network imperil the survival of the supply chain. Nat­
ural disasters allow us to capture operating difficulties using an exoge­
nous shock that is likely to be orthogonal to other firm shocks. But we
expect the same effects to arise all the times in which disruptions due to
strikes, labor shortages, cyberattacks, regulations, or difficulties in a
firm’s ability to obtain inputs impair the firm’s reliability as a supplier of
high quality and timely products and services.
While it is hard to capture all the above events in a systematic way,
we rely on an insight from Acharya et al. (2022), who argue that oper­
ating shocks arise from exposure to supply chain risk. We use the proxy
for supply chain risk based on textual analysis of earnings conference
calls of Ersahin et al. (2024). In Table 15, we show that firms that
experience heightened supply chain risk extend more trade credit to
their customers. These firms also receive more trade credit. While the
accounts receivables of firms experiencing heightened supply chain risk
may increase not only because their suppliers try to accommodate their
liquidity needs but also because at least some of their suppliers have to
compensate them for the expected disruption costs, these results support
the external validity of our earlier findings.
By converse, we do not expect a firm to provide more trade credit
Supply chains are important for firms’ performance. But operating
shocks due to natural disasters, cyberattacks, trade wars, and other
sources threaten supply chain stability and survival. We show that
supply chains remain stable when firms in the network are able to in­
crease trade credit flows to increase the value of the relationship for
their customers. The trade credit flows within the supply network
following operating shocks suggest that not only affected firms but also
their suppliers try to preserve the stability of the supply chain. Thus,
suppliers extend trade credit to the affected firms, especially if the latter
are financially constrained and would otherwise be unable to provide
short-term funding to their customers.
Production networks become unstable and the affected firms’ prof­
itability decreases when financial constraints are pervasive and affect
not only the affected firms, but also their suppliers. These problems may
be far stronger for production networks that include small businesses.
Our empirical analysis thus provides a lower bound for the negative
effects of operating shocks on the instability of supply chains and pro­
vides support for policies, such as the American Rescue Plan, enacted at
the start of the COVID-19 pandemic: Besides relieving a firm’s financial
constraints and supporting employment, these policies are likely to have
sustained trade credit flows and the stability of the supply chains.

17
N. Ersahin et al. Journal of Financial Economics 155 (2024) 103830

CRediT authorship contribution statement Declaration of competing interest

Nuri Ersahin: Writing – review & editing, Writing – original draft,
Visualization, Validation, Supervision, Software, Resources, Project
administration, Methodology, Investigation, Funding acquisition,
Formal analysis, Data curation, Conceptualization. Mariassunta Gian­
netti: Writing – review & editing, Writing – original draft, Visualization,
Validation, Supervision, Software, Resources, Project administration,
Methodology, Investigation, Funding acquisition, Formal analysis, Data
curation, Conceptualization. Ruidi Huang: Writing – review & editing,
Writing – original draft, Visualization, Validation, Supervision, Soft­
ware, Resources, Project administration, Methodology, Investigation,
Funding acquisition, Formal analysis, Data curation, Conceptualization.
Nuri Ersahin declares that he has no relevant conflicts or material
financial interests that relate to the research described in this paper.
Mariassunta Giannetti declares that he has no relevant conflicts or
material financial interests that relate to the research described in this
paper.
Ruidi Huang declares that he has no relevant conflicts or material
financial interests that relate to the research described in this paper.
Data availability
https://data.mendeley.com/datasets/5nwh6jwb46/2.

Supplementary materials

Supplementary material associated with this article can be found, in the online version, at doi:10.1016/j.jfineco.2024.103830.

Appendix A

Variable definitions

Variables Definition

Change in payables Change in accounts payable, scaled by cost of goods sold, between time t + 4 and t
Change in receivables Change in accounts receivable, scaled by total sales, between time t + 4 and t
Change in net receivables Change in accounts receivable minus accounts payable scaled by sales, between time t + 4 and t
Change in write down Change in write downs, scaled by total assets between time t + 4 and t
Change in cash Change in cash and cash equivalents, scaled by total assets between time t + 4 and t
Change in assets Change in the natural logarithm of total assets between time t + 4 and t
Change in log sales Change in the natural logarithm of total sales between time t + 4 and t
Change in COGS Change in the natural logarithm of cost of goods sold between time t + 4 and t
Change in investment Change in capital expenditures, scaled total assets between time t + 4 and t
Change in ROA Change in operating income before depreciation, scaled by total assets between time t + 4 and t
Affected Equals one if a firm is headquartered in a county that is impacted by a natural disaster at time t and zero otherwise
Affected customer (supplier) Equals one if a firm’s customer (supplier) is located in a county that is impacted by a natural disaster in year t and zero
otherwise.
Size Natural logarithm of the total book value of assets
Leverage The sum of long-term and short-term debt, scaled by total assets
Age Natural logarithm of the difference in years between current year and the first year in Compustat
Profit Income before extraordinary expenses, divided by total assets
Fluidity The competitive and product market threat surrounding a firm, defined as in Hoberg et al. (2014)
HHI Market concentration measured as the Herfindahl index of firm sales
Customer size Indicators for size quartiles
Number of states The number of states in which a firm operates
High inventory Equals one if the firm has an above median level of inventories over assets and zero otherwise
Relationship length Average length of a treated firm’s relationships with its customer, measured from when a firm and its customer are first
reported in Factset Revere
Superstar Equals one if the firm’s market value is in the top 1% of the industry and zero otherwise
Relative size Natural logarithm of the affected firm’s customers’ average size scaled by its own size
Major customer Equals one if the firm reports a major customer with more than 10% of sales in the financial statements and zero otherwise
Percentage of constrained suppliers Percentage of suppliers that are financially constrained according to the financial constraint measures
Change in number of customers for the affected firms Change in the natural logarithm of customers between year t + 1 and t
Change in number of new suppliers for the affected firms’ Change in the number of new suppliers, scaled by total suppliers between year t + 1 and year t
customers
Avg supplier size by industry The average size of the suppliers in a given year and industry for the firm
Disaster in last 5 years Equals one if the firm is in a county that had a natural disaster in the last 5 years and zero otherwise
Customer dependence We use two measures for customer dependence, please see Relative size and Major customer above
High SCRisk Equals one if the firm’s supply chain risk is in the top quintile and zero otherwise, according to the supply chain risk
measure in Ersahin et al. (2024)

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