Firm digitalization and inter-firm financing along the supply chain

Abstract

This paper explores how customer-supplier financing relations are reshaped when the customer goes digital. We use trade credit to measure inter-firm financing along the supply chain and find that the customer's firm digitalization significantly reduces its reliance on inter-firm financing, particularly when its suppliers concentrate, or when its suppliers are at a long distance. Additional tests suggest that the efficiency-improving channel and the cost-saving channel are likely underlying mechanisms. Cross-sectional analysis find that the relationship between firm digitalization and inter-firm financing is more pronounced among firms with greater financial constraints, greater market competition, firms located in regions with greater financial development, and greater digital inclusive finance. We also find that the impact of firm digitalization is greater during the COVID-19 pandemic. Our paper provides new insights into the externalities of firm digitalization on supplier-customer relationships.