Using the staggered adoption of collateral law reforms across Europe, we examine their effects on trade credit financing. We find that firms in countries that adopt such reforms receive less trade credit, consistent with suppliers viewing these firms as less creditworthy. Moreover, this decrease in trade credit is more pronounced for firms and industries with more movable assets, for financially constrained firms, and for firms in countries with strong legal enforcement, indicating that collateralization of movable assets drives this relation. Our findings suggest that the use of movable assets as collateral in bank borrowing increases supplier risks and decreases demand for trade credit, thus discouraging its use.

Does pledging movables as collateral alter corporate borrowing? To answer this question, we study the effect of collateral law reforms on syndicated bank loans granted across nine European countries that facilitated pledging movables between 1995 and 2019, comparing them to 19 countries that did not. We differentiate firms in sectors of higher versus lower asset movability to strengthen the identification. We find that although the reforms have enabled firms in movable-intensive sectors to issue more secured loans, the average cost of the loans and the number of covenants have also increased. Channel tests suggest that banks may demand more to compensate for the potential wealth redistribution induced by newly issued secured credit, or the unique risk involved with using movables as collateral.