Firms as liquidity providers: Evidence from the 2007-2008 financial crisis

Using a supplier-client matched sample, we study the effect of the 2007-2008 financial crisis on between-firm liquidity provision. Consistent with a causal effect of a negative shock to bank credit, we find that firms with high pre-crisis liquidity levels increased the trade credit extended to other corporations and subsequently experienced better performance as compared to ex-ante cash-poor firms. Trade credit taken by constrained firms increased during this period. These findings are consistent with firms providing liquidity insurance to their clients when bank credit is scarce and provide an important precautionary savings motive for accumulating cash reserves.