Customers "Banking" on Your Working Capital

Customers "Banking" on Your Working Capital Nearly all business-to-business suppliers are feeling their working capital squeezed by customers delaying payments, according to the Credit Research Foundation. Sarah Johnson - | US March 4, 2009 Nonfinancial companies are unwittingly acting as banks these days, as customers slow down their payments in an attempt to give their own working capital flexibility. In a recent survey of corporate credit-department managers, 94 percent said they suspect that their customers are leaning on them for their working-capital needs more than they were during the past few years. And it's no wonder creditors have that concern: 79 percent of 1,085 companies surveyed last month said that they have seen a general slowdown in their customers' payments. And just over two-thirds said their customers' banks have tightened their lending practices.

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What Gives? A Study of Firms' Reactions to Cash Shortfalls. 

This paper examines whether firms react to cash shortfalls by cutting investment. We use a regression discontinuity design in which the discontinuity is the point of violation of underfunding of corporate defined benefit pension plans. We reexamine the puzzling evidence in Rauh (2006) that mandatory pension contributions cause sharp investment declines, finding that these results are likely due to the endogeneity that this study is trying to avoid. We also compare firm-year observations in which the firm’s pension assets are just barely less than its pension liabilities to observations in which assets are just greater than liabilities. In this quasi-experimental setting, we find little evidence that firms cut back on investment. Instead, they mostly use a variety of financial tools, such as receivables factoring and payout cuts, to fund their pension liabilities.

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