Impact of Climate Risk on Firms’ Use of Trade Credit: International Evidence

ABSTRACT

We examine the association between climate risk and trade credit. We predict that firms exposed to climate risk-driven liquidity shocks prefer to use less trade credit. Using the Global Climate Risk Index of 86 countries, we find that firms located in countries characterized by severe weather events prefer to use less trade credit. In additional analyses, we find that the negative association between trade credit and climate risk is more pronounced for firms with more volatile cash flow and less collateral. Our results are robust to the use of alternative climate risk measure, alternative econometric methods, and exclusion of outliers.

KEYWORDS:

• Trade credit
• climate risk
• liquidity shocks
• extreme weather
• collateral

Acknowledgments

We express special thanks to Dr. Shofiqur Rahman, Assistant Professor of Finance, New Mexico State University, Las Cruces, NM, and Dr. Richard Brody, Professor, Anderson School of Management, University of New Mexico.

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

¹ Liquidity risk and liquidity shocks have been interchangeably used in this article.

² The appendix can be found online at www.tandfonline.com/uitj.

³ The high dimensional fixed effects models are implemented using reghdfe (Correia 2016).

⁴ $-3.30-\left(-4.16\right)]\left[exp\left(-0.018\right)-1\right]=1.53\mathrm{\%}.$

Additional information

Funding

This study was supported by the Cochran Summer Research Grant.