Does trade credit absorb adverse shocks? Evidence on SMEs in Japan

The aim of this paper is to examine whether trade credit can help absorb adverse shocks to firms. When firms encounter exogenous adverse shocks, if relaxation of terms of credit payment to suppliers can hold back the level of firms' real activities, then they do not need to reduce their purchases from suppliers. We test this hypothesis by using data of SMEs (small- and medium-sized enterprises) from two corporate surveys taken in Japan after the Global Financial Crisis and COVID-19. We find that firms with extended payment periods are still likely to reduce their purchases from suppliers, which indicates trade credit does not help to absorb adverse shocks.