Debt Structure and Bankruptcy of Financially Distressed Small Businesses

Author Name TSURUTA Daisuke  (National Graduate Institute for Policy Studies / CRD Association) /Peng XU  (Faculty of Economics, Hosei University)
Creation Date/NO. May 2007 07-E-032
Download / Links


Using a large sample of financially distressed small firms in Japan, we find that a distressed firm goes bankrupt faster if it uses proportionately more trade credits. Financially distressed firms experiencing a sharp decrease in trade payables are also more likely to go bankrupt. This suggests that coordination failure among a large number of dispersed trade creditors contributes to the bankruptcy of financially distressed firms. This finding supports the hypothesis that suppliers have an incentive to acquire credit information on distressed firms, and are able to do so more quickly than banks. Accordingly, they withdraw credits more quickly because trade credits, unlike bank loans, are unsecured.