Exploring the Impact of Trade Credit and Debt on Systemic Risk in the Presence of Financial Distress and Constraints

Based on the extreme value and network contagion theories, this study intends to explore the effects of trade credit, and short/long-term debt on the systemic risk of 205 Pakistani non-financial firms over the period from 2005 to 2021. To evaluate the firms’ systemic contribution and vulnerability, we apply two firm-specific measures, the change in conditional value-at-risk (DCOVAR) and marginal expected shortfall (MES). Our findings reveal a significantly positive impact of trade credit, and short/long-term debt on the systemic contribution and vulnerability of these firms. The findings also indicate that the underlying relationship is significantly moderated by financial distress and financial constraints. Understanding how different forms of debt influence systemic risk can guide policymakers in crafting regulations or interventions to promote a healthier financial environment. Regulators may reevaluate the balance between short/long-term debt usages or develop guidelines for managing trade credit effectively to mitigate systemic risk.