Corporate Resilience to Banking Crises: The Roles of Trust and Trade Credit

Ross Levine, Chen Lin, and Wensi Xie (2016 NBER working paper)


  • Regress outcome on trust, crisis, and trust*crisis (difference-in-differences)
    • outcome ∈ {use of trade credit, profitability, employment}
    • trust is the extent to which people in a country trust each other.
      • Following La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997a) and Guiso, Sapienza, and Zingales (2008), they use responses to the World Value Survey, in which participants are asked whether they trust other people.
    • crisis equals 1 for the year in which a banking crisis starts and for each of the two following years (follow Laeven and Valencia (2012) in dating crises).
    • Data covers 3,600 manufacturing firms in 34 countries from 1990-2011, and comes from Worldscope.
  • Examine whether results are stronger in industries that rely more on short-term liquidity.
    • Define industry short-term liquidity needs as the ratio of inventory to sales, using U.S. firms only (data from Compustat).
      • the ratio of inventory to sales is supposed to capture the proportion of working capital that is financed by ongoing sales.
    • control for severity of crisis, maturity of country financial markets, macro-economic conditions, quality of government institutions, legal shareholder and creditor protections, etc.


  • Firms’ outcomes are better (firms are more resilient) in high-trust countries, since they can rely on informal trade credit financing when the banking channel is in crisis.  In another words, firms who have good relationships with their suppliers (and maybe customers) can rely on them in bad times.
  • The effect is stronger for firms whose operations imply greater short-term liquidity needs.