Suppliers are subject to the credit risk of their customers when they sell products on credit. However, rights to the collateral value of the products they sell may mitigate some of this risk. This paper demonstrates the important role of laws that support suppliers’ rights to reclaim and liquidate collateral. Using a change in the US bankruptcy code that altered the rights of a subset of suppliers, I use a difference-in-differences setting to show that an improvement in suppliers’ rights to the liquidation value of collateral results in an increase in the amount and duration of trade credit offered. The increase in collateral protection also reduced suppliers’ lending standards, resulting in more dispersed trade credit lending and riskier customer portfolios. Finally, I find that the increase in collateral rights decreased suppliers’ incentives to monitor their customers, consistent with collateral and monitoring being substitutes. Overall, the paper shows that with strong legal protections in place, trade credit has an important collateral component.

How do shocks to the banking sector travel through the corporate economy? Using a novel data set of interfirm sales, I show that suppliers exposed to a large and exogenous decline in bank financing pass this liquidity shock to their downstream customers. The spillover effect occurs through two channels: a reduction in trade credit offered and a reduction in the total supply of goods and services. After exposure to the spillover, downstream customers show a spike in credit risk and a reduction in employment. Overall, the paper highlights the importance of financial spillovers in explaining corporate sector outcomes.

We examine the effect of financial reporting quality on the trade‐off between monitoring mechanisms used by lenders. We rely on Sarbanes‐Oxley internal control reports to measure financial reporting quality. We find that when a firm experiences a material internal control weakness, lenders decrease their use of financial covenants and financial‐ratio‐based performance pricing provisions and substitute them with alternatives, such as price and security protections and credit‐rating‐based performance pricing provisions. We also find that changes in debt contract design following internal control weaknesses are substantially different from those following restatements, where lenders impose tighter monitoring on managers’ actions, but do not decrease their use of financial statement numbers.

Although balanced budget rules are widely used throughout the world, there is considerable debate on whether and how they impact fiscal outcomes. Existing research shows that states with strict balanced budget rules address deficits by raising taxes and curbing expenditures. However, little is known about whether politicians can meet budget rules by shifting resources inter-temporally or by transferring revenues from funds not subject to balanced budget rules into funds that are required to meet a balanced budget. We show that, in addition to increasing taxes and cutting expenditures, states with strict balanced budget rules sell public assets and transfer resources across government funds to close the budget shortfall. Our findings suggest that current budget deficits not only influence the current-period taxpayers, but also impact future taxpayers and other funds within the government. The results complement existing research by expanding our understanding of the effects of balanced budget restrictions on politicians' fiscal actions.

We examine whether discrimination affects customers’ willingness to pay their suppliers. Using a dataset of detailed trade credit networks, we find that when facing a macroeconomic shock, customers delay payments to their suppliers with female or black trade credit officers at a 10%–20% higher rate relative to their payments to non-minorities. These results hold after controlling for a host of economic differences between minority groups and non-minority groups. In particular, we exploit the complexity of the supply chain network – wherein suppliers transact with multiple customers in each month and customers transact with multiple suppliers in each month – to estimate within-relationship changes in payment behavior during periods of financial hardship. Results indicate that the largest increases in payment delays are between customers that are classified as having racial or gender biases and suppliers that have minority lead credit officers. The results suggest that biased beliefs and preferences play a critical role in trade credit.

We assess the role of human discretion in lending outcomes using a randomized, controlled experiment. The lenders in our sample utilize a third party, machine-generated credit model as an input in their decision. We design a new feature for the credit-scoring platform – the slider feature – which invites lenders to incorporate additional discretion in their decision by adjusting the machine-based recommendation. We compare the loan outcomes for treatment lenders that randomly get the slider, relative to a control group. The treatment group's adjustments are predictive of forward looking portfolio characteristics – they show larger declines in future portfolio-level credit risk and larger increases in future sales orders, relative to the control group. The effects of our intervention are more pronounced when borrowers do not have social media accounts and in competitive markets. Our study provides insights about the role of human decisions, given the rapid evolution of machine-based lending models.