Suppliers as Financiers of the Last Resort : The Effect of Exogenous Changes in Analyst Coverage on Trade Credit Use

We document a negative causal relationship between changes in the analyst coverage of buying firms and their use of trade credit, thus establishing an "information production" hypothesis of trade credit usage. We show that firms use trade credit to a greater extent when the extent of asymmetric information facing external financiers (such as banks) about buying firms increases, thus increasing suppliers' information advantage with respect to such external financers. We establish a causal relationship between trade credit use and analyst coverage using two different identification methodologies: first, using exogenous changes in the analyst coverage of firms following brokerage house mergers; and second, using an instrumental variable (IV) analysis. Our cross sectional analyses provide further support for the information production hypothesis. First, increases in trade credit usage following reductions in analyst coverage are smaller for firms with closer established lending relationships with banks and those incurring higher audit fees. Second, increases in trade credit usage following reductions in analyst coverage are larger for financially constrained firms and those headquartered in regions characterized by a higher extent of social capital