Does CEO inside debt enhance firms’ access to trade credit?

In this study, we investigate whether CEO inside debt, a compensation mechanism designed to align managers’ and debtholders’ interests, plays a role in facilitating firms’ ability to secure higher trade credit from their suppliers. We argue that CEO inside debt offers heightened assurance to trade creditors, resulting in their greater willingness to extend higher levels of trade credit. Firms perceive this as a favourable source of short-term financing compared to traditional bank financing due to its cost-effectiveness and considerably lower barriers to access. Contrary to the previous studies, our empirical analysis encompassing a sample of non-financial firms in the United States reveals a significant positive relationship between CEO inside debt and firms’ ability to secure trade credit. This confirms our assertion that trade credit suppliers’ increased willingness to accept a higher level of risk is driven by the confidence instilled by the CEO inside debt holdings. Furthermore, we show that this relationship is significantly stronger in financially constrained firms, where it serves as a critical assurance mechanism for suppliers of trade credit. Suggesting that CEO inside debt play a key role in sustaining financially constrained firms that are typically neglected by formal lending institutions.