Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/77055

Trade credit substitute for debt? Evidence from the TCJA’s interest deduction limitation

File Size Format  
HARC-2022 paper 364.pdf 447.42 kB Adobe PDF View/Open

Item Summary

Title:Trade credit substitute for debt? Evidence from the TCJA’s interest deduction limitation
Authors:Shevlin, Terry
Venkat, Aruhn
Yoo, Il Sun
Keywords:Trade credit
Interest deductibility limitation
TCJA 2017
debt financing
Date Issued:2021
Abstract:We examine whether trade credit and traditional debt (bond and bank credit) are substitutes. We use the TCJA’s interest deductibility provision as a source of variation in the after-tax cost of traditional debt. Using a difference-in-differences design, we find that firms subject to the limitation increase trade credit by 7.7% compared to control firms following TCJA. We find similar results using state tax conformity to the interest limitation as a third source of variation. Next, we find that trade credit substitutes for lost debt financing, but that trade credit does not substitute for lost debt monitoring. We also find evidence of increased investment and decreased investment efficiency. From the supplier’s perspective, we find evidence that supplier-firm risk increases due to the interest limitation. Overall, we find evidence that trade credit imperfectly substitutes for traditional debt, leading to investment effects and increased supplier risk.
URI:http://hdl.handle.net/10125/77055
Appears in Collections: 03 Taxation (TAX)


Please email libraryada-l@lists.hawaii.edu if you need this content in ADA-compliant format.

Items in ScholarSpace are protected by copyright, with all rights reserved, unless otherwise indicated.