Impact of supplier’s right to initiate customer’s insolvency on trade credit

Suppliers are exposed to the default risk of customers when selling goods on credit. Some of this risk can be mitigated if suppliers attain the right to initiate insolvency under bankruptcy laws. However, suppliers’ incentives to safeguard their customer base can deter them from initiating insolvency proceedings, making these rights a hollow threat. In this paper, we investigate the impact of insolvency rights to suppliers under bankruptcy laws on their trade credit behavior. Exploiting the implementation of the ‘Insolvency and Bankruptcy Code’ (IBC) in India that accorded insolvency rights to suppliers, we show that these rights increase trade credit supply. Further, we find that suppliers with weak bargaining power and high sales volatility extend higher trade credit after IBC suggesting that firms' incentives play a role in the increased provision of trade credit after IBC. These results suggest that strengthening of suppliers’ rights under insolvency laws can increase the flow of trade credit in an economy