Shock Propagation Through Trade Credit: Evidence From Operation Weak Flesh

Abstract

We investigate whether and how shocks propagate through trade credit. We exploit a large negative liquidity shock to firms in the Brazilian food industry, resulting from the announcement of a fraud investigation named Operation Weak Flesh. Using a differences-in-differences analysis, we show that quarterly accounts payable of the affected firms drop by 20-30 percent. Their suppliers reduce the provision of trade credit by 5-6 percent. The evidence suggests that risk mitigation concerns dominate business relationship concerns or bargaining power effects. Suppliers mitigate the increased credit risk in the supply chain rather than supporting their customers with additional trade credit.