When the economy tanks, businesses stop lending to each other, but political drama actually makes them lend more.
March 19, 2026
Original Paper
Political and Non-Political Risk and the Dynamics of Trade Credit
SSRN · 6437642
The Takeaway
Most risks cause firms to hoard cash and tighten credit. However, the study found that political risk leads to a gradual increase in trade credit, suggesting that businesses use inter-firm financing as a strategic tool to navigate long-term political instability rather than retreating from the market.
From the abstract
This paper examines how firms adjust trade credit, a major inter-firm financing margin within supply chains, in response to different types of risk. Using quarterly U.S. firm-level data from 2002Q1 to 2022Q1, I find that overall and non-political risk shocks are followed by immediate short-run contractions in net trade credit, consistent with precautionary liquidity tightening. In contrast, political risk shows no initial contraction; instead, its response builds gradually, turning positive at m