Why do firms extend trade credit? The role of inventories

Abstract

We are the first to explore the role of inventories as a trade credit driver in an economic/financial crisis setting. To this end, we make use of a panel of 198,024 manufacturing firms from eleven euro‐area countries over the period 2006–2022. We find an inverse relationship between the stock of inventories and trade credit extended, which is magnified during the recent sovereign debt crisis. These results are robust to using different definitions of trade credit extended and of the crisis. Furthermore, we find that the association between inventories and trade credit extended is driven by financially constrained firms and firms producing differentiated products.