Increased creditor protection in bankruptcy and trade credit: Evidence from the 2005 BAPCPA

Abstract

We examine whether the increased creditor protection under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) affects suppliers’ provision of trade credit to their customers with high default risk. Employing a difference-in-differences analysis for a sample of U.S. public firms during 2002-2008, we find that suppliers whose customers have high default risk extend more trade credit after BAPCPA. We also find that this relation exists when suppliers have stronger reliance on their customers and when customers exhibit fewer risk characteristics. Overall, our results indicate that the increased creditor protection in bankruptcy induces suppliers to offer more trade credit to customers with high default risk during the ordinary course of business. Our findings have policy implications given the heated debate on the BAPCPA’s effect on Chapter 11 bankruptcy process.