The COVID-19 pandemic resulted in an extremely rare instance of a shock to global product markets. Using quarterly data for a sample of 7397 firms from 54 countries over the period 2017–2020, we study the causal impact of this shock on trade credit. Employing a difference-in-difference analysis, we find that, in contrast to findings in the literature on financial market shocks, low-credit quality firms are credit-rationed by their suppliers during a shock to product markets and that for low-credit quality firms, there is no substitution of trade credit with financial credit. Importantly, however, our analysis shows that low-credit quality firms with better stakeholder relations are able to obtain more trade credit than those with weaker stakeholder relations. Our results are robust to alternative definitions of key variables, alternative methodologies that address endogeneity concerns, a placebo test, stage of market development, and various levels of controls for unobserved heterogeneity. We show that trade credit is conditional on product market conditions and is not always a generous substitute for financial credit. However, maintaining good relations with stakeholders serves as an antidote to the adverse effect of product market shocks on trade credit.
