Francesca Toscano and Ranjan D’Mello published in finance journal
Mike Ilitch School of Business Professors of Finance Francesca Toscano and Ranjan D’Mello recently co-authored a paper published in the Journal of Corporate Finance. Journal of Corporate Finance publishes “high-quality, original manuscripts that analyze issues related to corporate finance.”
Their paper, “Economic Policy Uncertainty and Short-Term Financing: The Case of Trade Credit,” discusses the impact of economic policy uncertainty on trade credit.
We examine the impact of economic policy uncertainty on trade credit. We document a decline (increase) in accounts payable, receivable, and net credit during periods of high (low) policy uncertainty and that firms react quickly to changes in uncertainty. The relation is long-term and holds after controlling for endogeneity, non-policy economic and political uncertainties, and the Great Recession. Industry competitiveness, proxied by firm market power, moderates the impact of economic policy uncertainty on trade credit. Uncertainty about monetary and fiscal policies, taxes, and regulations are the major drivers of trade credit changes. The reduction in trade credit during periods of increasing uncertainty can be explained by financial distress, constraints, and relation-specific investment channels.