Credit Contagion and Trade Credit Supply: Evidence from Small Business Data in Japan

In this paper, using microdata in Japan, we investigate whether credit contagion decreases trade credit supply for small businesses. In 1997-98 the Japanese economy experienced a large recession, and the number of dishonored bills and the number of bankruptcy filings caused by the domino effect increased. During a period of credit contagion, if firms possess higher financial claims than other firms, the possibility of default becomes higher. Therefore, if the problem of credit contagion is serious during such a period, suppliers withdraw trade credit from customers with higher trade receivables. They might also withdraw more trade credit from customers even though the credit risk of the customers is low. We find that during a recession, suppliers reduce trade credit more for small businesses with higher trade receivables. Additionally, in the manufacturing trade, credit is reduced for both risky and non-risky small firms. This effect in other industries, however, is weak.