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Does Trade Credit Really Help Relieving Financial Constraints?
Abstract
The European Union introduced a directive aimed at reducing trade credit due to its supposedly negative effect on the European economy. This contrasts with the redistribution view arguing that trade credit could facilitate the financing of credit‐constrained firms by more liquid suppliers. But does trade credit mainly flow from relatively unconstrained suppliers to more financially constrained buyers? To answer this question, we look at the characteristics of net borrowers with respect to net lenders and then estimate the substitutability between trade and bank debt separately for the two groups of firms. Overall, the results show that, in Italy, efficient redistribution does not tend to prevail in the trade credit market.
... Finally, as firms with more fixed assets may use them as collateral guarantees in their banking relationships, we include a tangibility indicator (Asset Tangibility, computed as tangible fixed assets divided by total assets). Companies that can rely on alternative financing sources use less trade credit in their commercial transactions (Cosci et al. 2020). For this reason, we control for the firm's level of internal capital (Cashflow, expressed in logarithm) and two additional variables: Listed, a dummy variable equal to one if the firm is listed in the stock market, and zero otherwise; and Group, a dummy variable equal to one if the firm belongs to a business group, and zero otherwise. ...
... The Survey on Italian Manufacturing Firms provide information about the existence of such collaborations and allows us to create a dummy variable, Collaboration Agreements, which is equal to one if the firm is engaged in these contracts and zero otherwise. 24 The estimation results are reported in Table ??. Starting with family ownership (Panel A), the regression coefficients indicate that relationship lending is positively and significantly associated with the use of trade credit only for the subsample of family owned firms (columns 1-2). ...
Using a unique sample of Italian manufacturing firms, we investigate the impact of relationship lending on firms’ use of trade credit. We find that firms maintaining close and long-lasting relationships with their main banks are associated with higher amounts of trade credit extended by suppliers. This result is robust to alternative measures of trade credit and relationship lending, and to different estimation techniques. We also analyze the mechanisms driving the association between relationship lending and the use of trade credit. Regression results suggest that the positive link between accounts payable and relationship lending is especially significant for firms that use to provide soft information to their lenders and for companies with greater relational abilities.
Plain English Summary The existence of close and long lasting lending relationships positively affects the amount of trade credit manufacturing firms receive from their suppliers. By relying on the Survey on Italian Manufacturing Firms, we show that the positive link between relationship lending and the use of trade credit is driven by two channels: private information and relational capital. In a policy perspective, our findings reveal a need for banking regulation and supervision to encompass banking business models in evaluating banks. The current approach might not be suitable for local banks investing in soft information acquisition and could weaken SMEs’ chances to receive both bank financing and trade credit from suppliers. Moreover, from a managerial point of view, our results uncover the relevance of firms’ ability to create strong relationships with banks, suppliers, and other companies that may help alleviating financial constraints.
... During contractionary MP, banks refuse to give loans to small firms because of asymmetric information and credit rationing. Therefore, small firms increase FTC during tightening MP, and financial constraints firms accelerate the increase of FTC during tight MP (Gertler & Gilchrist, 1993;Lin & Zhang, 2020;Kim & Choi, 2005;Blasio, 2005;Cosci et al., 2020). Khoo and Cheung (2022) show that managerial abilities are positively related to TC. Again Khoo and Cheung (2022) investigate the impact of skill labor risk on TC. ...
This paper investigates the presence of the credit channel using firm-level panel data of 450 firms listed at the Pakistan Stock Exchange from 1988-2021. Moreover, it uses a two-step system generalized method of moments (S-GMM) estimator to extend the market power theory and Meltzer's firm trade credit (FTC) theory by integrating the moderating role of financialization (FLN) and gross domestic product (GDP) growth in establishing the effect of monetary policy (MP) on FTC. Specifically, our analytical framework enables us to estimate the marginal effect of monetary policy (MP) on FTC at different GDP levels by considering different fixed levels of MP instruments. The results reveal a positive effect of MP on FTC, confirming the credit channel of monetary transmission mechanism (MTM). The results reveal that higher FLN facilitates firms to avail external borrowing during contractionary MP, which decreases MP's positive effect on FTC. The findings show that 1% increase in GDP will reduce the negative effect of MP on FTC by 0.0004% and it is significant at 1%. Similarly, 1% increase in FLN increases the negative effect of MP on FTC by -0.0002. Moreover, the findings show that GDP growth strengthens the impact of monetary policy on firm trade credit. The empirical results give important policy implications. For example, FLN should increase competition among financial sectors to ensure the availability of funds and firms' investment efficiency at the time of contractionary MP. Moreover, the government should enhance GDP growth through tax exceptions so that firms should not suffer during tight MP periods.
... These outcomes might be affected by the bargaining power in the supply chain since several studies have found that firms with greater market power provide less trade credit (e.g. Cosci et al. 2020;Dass et al. 2015;Fabbri and Klapper et al. 2012), but this factor has been controlled in our analysis. ...
This paper analyses whether trade credit strategies depend on the family identity of the controlling shareholder. We use a sample of 4,022 private Spanish firms for the years 2004 and 2013 and examine family firm heterogeneity by analysing different thresholds of control, involvement in management and firm identification with the family name. The results reveal that family firms have more restrictive trade credit strategies than non-family firms. Moreover, among family-controlled firms, those with the strongest identification between the family shareholders and their firms are the most restrictive. However, family-controlled firms reduced trade credit less after the financial crisis of 2008. These firms supported their customers by limiting the impact of liquidity shocks during the crisis.
... The present study aims to determine whether boards of directors exert any significantly influence over trade credit among listed firms in Vietnam. Numerous investigations have concentrated on the factors influencing trade receivables [13][14][15] . However, corporate governance as a determinant has yet to be thoroughly explored. ...
Trade credit plays a significant role in firm performance, and proper corporate governance can help manage trade credit in the best interest of shareholders. Given the nature of high levels of information asymmetry and inadequate institutional quality in developing countries, the role of corporate governance linked to board characteristics is highly relevant in determining the level of trade credit granted. Even though trade credit might help firms win customers, excessive trade credit extension puts the firms at risk of working capital being abused by purchasers, and low liquidity which hampers smooth operations or even bankruptcy. In a developing country like Vietnam, it is likely that boards can act as a deterrence to business practices that are harmful to corporate performance. This research paper investigates the relationship between two board characteristics and trade receivables in Vietnam using data from 2010 to 2022. The research utilizes conventional panel data estimators, including the random effects model and the System Generalized Method of Moments. We find that board size tends to reduce trade receivables, implying that larger boards prevent firms from extending much trade credit which could lead to increased implicit costs and hamper firms’ liquidity. This result implies that firms benefit more from larger boards, rather than encounter troublesome coordination caused by more crowded boards. However, board independence is insignificantly associated with trade credit extension, suggesting that this factor does not help curb trade credit extension. This result negates the view that firms benefit more from independent directors and that independent directors do not necessarily enhance corporate governance in Vietnam. Based on these results, the research offers implications for the directors monitoring role and strategy management especially in a developing country.
... The latter action is commonly known as the redistribution view of trade credit in the extant literature (Hill et al., 2019). However, it has been challenged that trade credit facilitates efficient redistribution (Cosci et al., 2019). ...
There is an extensive literature that links firms’ access to formal financial services and trade credit. This is more relevant for firms operating in financially less developed countries. These firms could potentially face a binding bank loan constraint due to the distortions related to information asymmetry and moral hazard. Against this backcloth, this paper will explore the relationship between trade credit and financial constraints for Ethiopian firms. The main objective of this study is to explore the relationship between trade credit practice and financial constraints for Ethiopian manufacturing and service firms. We exploit the repeated cross-sectional data of 2011 and 2015 made available by the World Bank’s Ethiopian Enterprise Survey. To address the endogeneity problem between financial constraint and trade credit, the paper employs an instrumental variable (IV) approach. We find a negative relationship between financial constraint and trade credit use. In particular, financially constrained firms have a trade credit use which is about 10 to 18 percentage points lower than unconstrained firms, suggesting that bank credit constrained firms are also trade credit constrained. One policy implication is that addressing constraints in formal financing is more likely to increase the availability of alternative forms of finance such as trade credit.
... Beck et al. (2018),Beck et al. Fabbri and Klapper (2008),Zimon and Dankiewicz (2020),Cosci et al. (2020) Note(s): The variables Religion, Ethnicity, Female owner and Marital status were deemed as demographic factors that could affect trade credit supply Source(s): Authors' compilation based on field data and literature review(2021) ...
Purpose
The purpose of this study is to examine trade credit from agrochemical vendors as an alternative source of finance for cabbage producers in the Bono East Region of Ghana. The determinants of trade credit supply and impact on cabbage producer’s profitability are investigated.
Design/methodology/approach
The study sample size is 260. The perception index, probit regression, negative binomial regression and the propensity score matching (PSM) was employed to assess the perception of trade credit, factors influencing trade credit supply and the impact of trade credit supply on the cabbage producer’s profitability and agrochemical vendor’s welfare respectively.
Findings
The perception index analysis revealed that the agrochemical vendors, in general, had a positive perception of trade credit. Different groups of factors influence trade credit supply. Further along, the number of times trade credit was used by the cabbage producers was influenced by several factors. On the PSM result, trade credit use had a significant positive impact on the cabbage producer’s profitability. In detail, all the matching estimations revealed that profitability increased above Gh¢ 4,000.00 (US$ 692.04). Likewise, the robustness check result (Inverse Probability Weighted Regression Adjustment (IPWRA)), was no different from the matching estimations. Generally, the result indicates that the impact of trade credit supply on the agrochemical vendor's welfare using total household expenditure, total savings and income as proxy variables for welfare were positive.
Originality/value
Trade credit has encountered less attention in the agricultural finance discourse; however, this study makes an imperative contribution on the same. Specifically, the study reveals the determinants of trade credit supply from agrochemical vendors and a positive impact of trade credit use on the cabbage producer’s profitability, a result which has not been investigated in the trade credit literature.
... Beck et al. (2018),Beck et al. Fabbri and Klapper (2008),Zimon and Dankiewicz (2020),Cosci et al. (2020) Note(s): The variables Religion, Ethnicity, Female owner and Marital status were deemed as demographic factors that could affect trade credit supply Source(s): Authors' compilation based on field data and literature review(2021) ...
Purpose
The purpose of this study is to examine trade credit from agrochemical vendors as an alternative source of finance for cabbage producers in the Bono East Region of Ghana. The determinants of trade credit supply and impact on cabbage producer’s profitability are investigated.
Design/methodology/approach
The study sample size is 260. The perception index, probit regression, negative binomial regression and the propensity score matching (PSM) was employed to assess the perception of trade credit, factors influencing trade credit supply and the impact of trade credit supply on the cabbage producer’s profitability and agrochemical vendor’s welfare respectively.
Findings
The perception index analysis revealed that the agrochemical vendors, in general, had a positive perception of trade credit. Different groups of factors influence trade credit supply. Further along, the number of times trade credit was used by the cabbage producers was influenced by several factors. On the PSM result, trade credit use had a significant positive impact on the cabbage producer’s profitability. In detail, all the matching estimations revealed that profitability increased above Gh¢ 4,000.00 (US$ 692.04). Likewise, the robustness check result (Inverse Probability Weighted Regression Adjustment (IPWRA)), was no different from the matching estimations. Generally, the result indicates that the impact of trade credit supply on the agrochemical vendor's welfare using total household expenditure, total savings and income as proxy variables for welfare were positive.
Originality/value
Trade credit has encountered less attention in the agricultural finance discourse; however, this study makes an imperative contribution on the same. Specifically, the study reveals the determinants of trade credit supply from agrochemical vendors and a positive impact of trade credit use on the cabbage producer’s profitability, a result which has not been investigated in the trade credit literature.
... According to Molina and Preve (2012), firms in financial distress use a significantly larger amount of trade credit to substitute for alternative financing sources. Other researchers report that substitution becomes more critical when firms increase in age and size (Casey and O'Toole, 2014;Klapper et al., 2012;Cosci et al., 2020). ...
One of the most crucial obstacles for small- and medium-sized enterprises is access to credit primarily because of their high opacity. The existing literature underlines that relationship banks specialize in analyzing opaque firms, thereby allowing them better access to credit; however, what can opaque firms do if they cannot find a relationship bank? By using an Italian database, with more than 900 firms, we reveal that when opaque firms deal with transactional banks (the “odd couples”), they use a greater portion of trade credit. This result is robust to alternative measures of trade credit and lending technologies. We further analyze the mechanisms driving the association between odd couples and trade credit use. Regression results suggest that the positive association is particularly significant for firms with more market power, not “captured” by their primary bank, and located in areas with high levels of social capital.
... Trade credit is commonly viewed as a substitute for external finance, which is of particular importance for the financially constrained companies (Berger & Udell, 2006;Cosci, Guida, & Meliciani, 2019). It is frequently argued that whenever the intermediated and direct lending from the capital markets shrinks, corporate sector may engage in financial intermediation by providing the necessary financial resources to the companies, which experience a severe shortage of financing and operating cash flows. ...
We demonstrate that the “predator-prey” metaphor may be well-suited to describe trade finance mechanisms in emerging economies. Having analyzed the dynamics of trade credit in the Polish corporate sector over the period between 1997 and 2014, we found that suppliers of trade credit were smaller, younger, less liquid, less indebted, and more financially constrained than the beneficiaries thereof. The firms, which increased trade receivables during the analyzed period, improved their asset turnover ratio at the expense of operating profitability. In a quest for growth and cash flows, these firms appear to be forced to supply trade credit to their counterparties with a stronger bargaining position. Companies, which reported higher trade payables, enjoy higher cash flows and a better access to external financing, yet with no improvements to the operating KPIs. In contrast to the conventional wisdom, we hypothesize that trade credit bargaining may be a negative-sum game.
... This condition might be negatively amplified by asymmetric information between parties and moral hazards [6][7][8], which are even more significant if we consider SMEs, since the probability of being under financial constraint depends on a firm's size [9][10][11]. Therefore, it might prove too difficult or excessively costly for SMEs to finance investments and/or other managerial decisions using external resources and, consequently, companies could adopt internal resources if they are available [12,13] or, alternatively, trade credits [14][15][16][17]. Among managerial decisions, the payment of dividends represents one of the most important. ...
This article investigates the relation between dividend payout policy and financial constraints, focusing on the Italian SMEs between 2015 and 2019 and adopting credit ratings as a measure of access to external financial resources. According to our findings, there is a positive relation between firm solvency and the payment of dividends, suggesting that, when companies’ financial constraints are higher, we can expect lower odds that they will pay out dividends. Nevertheless, there is also evidence that younger SMEs are interested in signaling their expected profitability to attract future investors and support access to the capital market.
... Finally, as firms with more fixed assets may use them as collateral guarantees in their banking relationships, we include a tangibility indicator (Asset Tangibility, computed as tangible fixed assets divided by total assets). Companies that can rely on alternative financing sources use less trade credit in their commercial transactions (Cosci et al. 2020). For this reason, we include two additional firm-level controls: Listed, a dummy variable equal to one if the firm is listed in the stock market, and zero otherwise; and Group, a dummy variable equal to one if the firm belongs to a business group, and zero otherwise. ...
Using a unique sample of Italian manufacturing firms, we investigate the impact of relationship lending on firms' use of trade credit. We find that firms with close and long-lasting relationships with their main bank obtain higher amounts of trade credit. This result is robust to alternative definitions of trade credit and relationship lending, and to different estimation techniques. This positive link is especially strong for firms that use to provide soft information to their lenders and for companies with greater abilities to create valuable relationships with business parties.
We are the first to explore the role of inventories as a trade credit driver in an economic/financial crisis setting. To this end, we make use of a panel of 198,024 manufacturing firms from eleven euro‐area countries over the period 2006–2022. We find an inverse relationship between the stock of inventories and trade credit extended, which is magnified during the recent sovereign debt crisis. These results are robust to using different definitions of trade credit extended and of the crisis. Furthermore, we find that the association between inventories and trade credit extended is driven by financially constrained firms and firms producing differentiated products.
Using a sample of United Kingdom (UK) non-financial firms from 2009 to 2021, this paper examines the operating performance effect of aggressive and moderate use of trade payables and bank credit. The results demonstrate a hierarchical effect of the use of short-term credit on firms operating performance. In particular, the results show that aggressive use of bank credit achieves higher operating performance, followed by moderate use of trade payables and bank credit and then aggressive use of trade payables. We further document that operating performance of firms dealing in differentiated products, lower firm size, firms with higher market power and financially stable firms’ increases with aggressive and moderate use of trade payables and bank credit. Overall, the results indicate that firm operating performance is an increasing function of bank credit use and demonstrate the importance of short-term credit policies on firms’ operating performance. The results are robust after using a novel approach in addressing the issue of endogeneity.
This paper investigates the factors and effects of trade credit, as an alternative source of capital, by employing a generalized method of moments instrumenting for endogeneity based on a panel data set of public maritime shipping companies and compatible companies in other industries. Our study shows that the magnitude of trade credit is affected by profitability, financial leverage, company size, cost of capital, financial distress, institutional ownership, corporate power, corporate liquidity, asset intensity, and corporate growth. It also suggests that trade credit affects financial performance, equity value, and risk. These empirical findings yield important implications for principal financial officers, as discussed herein.
This article investigates the dividend informational content hypothesis, showing how managers react to a poor legal environment through positive and credible messages to investors. We analyze private and public limited companies between 2015 and 2019, exploring the relation between their dividend payout policies and the courts’ ability to enforce creditor rights in case of insolvency. Based on our results, we can observe a positive relation between judicial delay and the SMEs’ decisions on dividend payouts, meaning that as the inefficiency of courts increases, small businesses are ever more likely to pay out dividends so that they can send a positive message to the local capital market. On the other hand, our results cannot confirm the same relation for public limited companies, which operate n the global capital market, highlighting the key role of local ties.
This paper aims to prove whether financial rationing condition leads European enterprises to increase trade debt during the period 2008‐2016 and whether companies offering deferred payments to customers obtain trade debt from suppliers. The work contributes to the existing literature finding new empirical evidence on the substitution and matching hypotheses in times of crises, measuring the specific rationing conditions for businesses and distinguishing large, medium, small and micro‐sized companies. The results revealed that, in times of crisis, medium, small and micro firms, highly likely to be constrained, employ trade credit more extensively, as those granting deferred payment terms. This article is protected by copyright. All rights reserved.
This paper uses a panel of 224,604 Chinese firms over the period 2004–2009 linked with a set of unique city-level financial development data to examine how financial development affects the way corporate inventory investment is financed. We find that financial development enhances the use of interest-bearing loans and discourages the use of trade credit in financing inventory investment. These effects are more pronounced after the 2007 property rights reform, as well as for privately-owned firms, small firms, firms with no political connections, and firms located in coastal regions. Our results are robust to using a variety of different specifications, as well as different measures of financial development and estimation methods.
This paper investigates the impact of business strategy on firms’ trade credit policies. We find that firms following an innovation-oriented strategy (prospectors) offer significantly more trade credit to their customers than those following an efficiency-oriented strategy (defenders). Furthermore, by exploiting two exogenous shocks to the supplies of high-skill employees and bank credit, we find that prospectors curtail trade credit in response to the reduction of talent mobility following the adoption of Inevitable Disclosure Doctrine, whereas defenders significantly increase provisions of trade credit following the increase in bank credit supply due to the relaxation in interstate branching regulations. Additional evidence substantiates that prospectors increasing trade credit provisions enjoy higher sales generation efficiency and superior performance. Finally, our supply chain analysis documents that prospectors also receive significantly more trade credit from their suppliers. Collectively, our findings highlight that business strategy is an important yet intrinsic determinant of supply chain financing.
Despite the importance of trade credit as a source of financing, there is a significant and persistent decline in this form of short-term borrowing and lending over the 1979 to 2018 interval. The median firm's accounts receivable decreased by 52% while accounts payable ratio fell by 47%. The decline is systematic, as it is present in most industries and sub-samples of firms classified on different characteristics. Further, firms’ trade credit ratios are significantly less than predicted ratios based on firm-specific characteristics and industry factors, and this deficiency, which is pervasive, becomes more negative over time. However, changes in macroeconomic factors such as financial shocks, interest rates, changes in monetary policy and corporate tax rates, credit available in the economy, and the transition from manufacturing to technology-oriented economy, explain the deficiency as well as the time pattern.
Purpose
The authors document a persistent negative link between contemporaneous trade credit provision and subsequent firm-level operating performance.
Design/methodology/approach
Textual analysis of firms' profile descriptions is used to study the role of market segmentation and product differentiation in intermediating the nexus between trade credit and corporate performance. The paper relies on dynamic panel regression modeling to investigate the postulated empirical relationships. This approach allows to address endogeneity issues and to test a number of different model specifications.
Findings
Despite fueling short-term sales growth, the more generous trade credit terms are found to be associated with lower post hoc margins and declining overall business profitability. The market share is not affected by firms' proclivity to provide trade credit suggesting that the latter may not be effectively used as a long-term growth enhancement strategy. Firms' similarity to their competitors is found to play a salient role in altering the magnitude of the discovered negative relationship.
Originality/value
The authors find that the intensity of intra-industry competition measured by firms' similarity to their competitors magnifies the discovered negative trade credit-performance nexus. Therefore, generous trade credit may play a more important role in solidifying client–supplier relationships on the more segmented markets with a higher degree of product differentiation.
The existing literature provides strong evidence that working capital management affects a firm’s performance and value. In this paper, we examine how CEO age affects firms’ working capital decisions Using a sample of 28,243 firm-year observations of U.S. firms from 1993 to 2018 we find that net operating working capital increases with CEO age, and firms with younger CEOs hold lower levels of inventory and higher levels of payables. The results are robust to various model specifications and variable definitions, providing strong and robust evidence that younger CEOs tend to implement more aggressive working capital management policies (Aggressive strategy hypothesis). The findings provide important insights to the board of directors, investors, and various monitoring groups.
We examine if trade credit helped financially constrained SMEs survive the recent financial crisis. Using data for 202,696 SMEs across 13 European countries over the period 2003–2012, we show that trade credit had a large positive impact on firm survival, such that a one standard deviation increase in trade credit results in a 21% decrease in the likelihood of distress. We also report evidence of a significant redistribution effect, with cash rich or unconstrained SMEs extending significantly more net trade credit than their less financially resourced counterparts. The results are robust to several econometric concerns.
Using a unique sample of small and medium-sized Italian firms, we investigate the effect of financial constraints on firms' participation in domestic and international supply chains. We find that firms more exposed to bank credit rationing and with weaker relationships with banks are more likely to participate in supply chains to overcome liquidity shortages. This benefit of supply chains is especially strong when firms establish long-term trading relationships and when they forge ties with large and international trading partners. To control for possible endogeneity of firms' access to credit, we construct instruments capturing exogenous shocks to the structure of the Italian local banking markets.
Employing data on an extended sample of manufacturing firms during 1993–2012, the article studies the inter-linkage between trade credit and bank credit and how it evolved during the crisis. Accordingly, we first discuss the relevance of a trade-credit channel in India and subsequently, explore the interplay between these two financing forms. The analysis provides some evidence in favour of a trade-credit channel in India. More importantly, the findings indicate that bank credit and trade credit are complementary, although there was a differential impact on accounts payable (demand) and accounts receivables (supply) during the crisis.
JEL Classification: G21, G32, P52
Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two-part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness.
Although trade credit has long been an important source of financing for corporations, it is one of the least understood methods of doing business. One possible reason for misconceptions about trade credit is that it is not primarily financial in nature, but instead reflects production and marketing decisions. In this paper, we consider trade credit as a way that firms can guarantee product quality, rather than as a means of financing less creditworthy firms. In this context, we seek, and provide, possible explanations for observed phenomena such as relatively shorter (or no) trade credit terms for consumer and food products and relatively longer terms for heavy industrial equipment.
While trade credit is traditionally considered as a substitute for bank loans, recent theoretical papers (e.g. Biais and Gollier (1997)) suggest that bank debt and trade credit can also be considered as two complementary sources of financing. By using US small businesses data (NSSBF 1998), this paper provides an empirical analysis of these hypotheses. The empirical findings are consistent with the hypothesis that trade credit helps firms to improve their reputation. The results show that trade credit can work as a signal about firm's quality and thus facilitates access to bank debt. Keywords: Bank, Trade credit, Informational asymetry
This paper explores the substitution relationship between trade credit and bank credit, and its counter-cyclic dynamic pattern through economic cycles. We propose a new theoretical model, using a mechanism design method, which predicts the substitution between the two credits and its counter-cyclic behavior, subject to the condition of technological efficiency not less than one. This model also helps explain the somewhat contradictory evidence in the literature, on the relationship between the two credits. We present empirical evidence on the substitution effect and its counter-cyclic behavior, by using a balanced panel data set of 284 listed Chinese companies for the period 1998-2006. We further find that the substitution behaves counter-cyclically with respect to the coincident macroeconomic indicator, namely, GDP. Our empirical analysis also has some new features such as treating endogeneity carefully and incorporating the lag-effect of trade credit coherently.
This paper provides a simple framework showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit-constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The paper offers evidence from small business data in support of this hypothesis. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Firms may be financed by their suppliers rather than by financial institutions. There are many theories of trade credit, but
few comprehensive empirical tests. This article attempts to fill the gap. We focus on small firms whose access to capital
markets may be limited and find evidence suggesting that firms use more trade credit when credit from financial institutions
is unavailable. Suppliers lend to constrained firms because they have a comparative advantage in getting information about
buyers, they can liquidate assets more efficiently, and they have an implicit equity stake in the firms. Finally, firms with
better access to credit offer more trade credit.
Using a supplier–client matched sample, we study the effect of the 2007–2008 financial crisis on between-firm liquidity provision. Consistent with a causal effect of a negative shock to bank credit, we find that firms with high precrisis liquidity levels increased the trade credit extended to other corporations and subsequently experienced better performance as compared with ex ante cash-poor firms. Trade credit taken by constrained firms increased during this period. These findings are consistent with firms providing liquidity insurance to their clients when bank credit is scarce and offer an important precautionary savings motive for accumulating cash reserves.
Purpose
This study aims to investigate trade credit as a financing source among small- and medium-sized enterprises (SMEs), particularly the influence of short-term debt, long-term debt and profitability on the use of such credit.
Design/methodology/approach
Ordinary least squares (OLS), fixed-effects and generalized method of moments (GMM) system models were used to analyze a large cross-sectional panel data set of 15,897 Swedish SMEs in five industry sectors for the 2009-2012 period.
Findings
The study provides empirical evidence that long-term debt and profitability each significantly and negatively influence trade credit (i.e. accounts payable) and that short-term debt positively influences trade credit. Notably, while trade credit seems to complement other short-term debt, it replaces long-term debt. Moreover, firm size in terms of sales is positively related and firm age is negatively related to accounts payable. Industry affiliation is another significant explanatory variable.
Practical implications
The results provide debt holders, potential investors, policymakers and academic researchers with insights into the relationship between trade credit demand, on the one hand, and external financing (i.e. short- and long-term debt) and internal retained earnings (i.e. profit), on the other. From a manager’s perspective, the findings may be important for decision-making regarding trade credit use.
Originality/value
When investigating trade credit determinants, the literature has seldom distinguished between short- and long-term debt and considered that they may influence the use of trade credit in different ways. The present study adds to the literature by using OLS, fixed-effects and GMM system models to analyze a large cross-sectoral sample in a high-tax country where both bank loans and trade credit are considered important financing instruments.
Mounting evidence indicates that firms, particularly SMEs, suffered from a significant credit crunch during this crisis. We analyze for the first time whether trade credit provided an alternative source of external finance to SMEs during the crisis. Using firm-level Spanish data we find that credit constrained SMEs depend on trade credit, but not bank loans, and that the intensity of this dependence increased during the financial crisis. Unconstrained firms, in contrast, are dependent on bank loans but not on trade credit.
This paper investigates how the supplier's bargaining power affects trade credit supply. We use a novel firm-level database of Chinese firms with unique information on the amount, terms, and payment history of trade credit extended to customers and detailed information on product market structure and clients-supplier relationships. We document that suppliers with weak bargaining power towards their customers are more likely to extend trade credit, have a larger share of goods sold on credit, and offer a longer payment period before imposing penalties. Important customers extend the payment period beyond what has been offered by their supplier and generate overdue payments. Furthermore, weak bargaining power suppliers are less likely to offer trade credit when credit-constrained by banks. Our findings suggest that suppliers use trade credit as a competitive device in the product market.
While many theories of accounts payable and receivable are related to firm performance, there has not been a direct test whether firms actively use them to manage their growth. We argue that it is not just the accounts payable but also the accounts receivable that matter. While the former help to alleviate imperfections in the financial market, the latter do so in the product market. Using over 2.5 million observations for 600.000 firms in 8 euro area countries in the period 1993–2009, we show that firms use the trade credit channel to manage growth. In countries where the trade credit channel is more present, the marginal impact is lower, but the total impact is still higher. Further, firms that are more vulnerable to financial market imperfections, rely more on the trade credit channel to manage growth. Finally, we show that also the overall conditions of the financial market matter for the importance of the trade credit channel for growth.
New data on the sources of finance for the non-financial corporate sector show that Italian firms as a whole use more equity finance than their Anglo-Saxon counterparts, and smaller Italian firms use equity more intensively than larger firms. Both findings can be understood in terms of the structure of industry and banking in Italy and the relations between them. Firm managers have considerable autonomy vis-à-vis both financial markets and intermediaries, and the Italian financial system should be seen as substantially different from either the high internal finance systems of the USA and the UK or the bank-based system of Japan.
Firms may be financed by their suppliers rather than by financial institutions. There are many theories of trade credit, but few comprehensive empirical tests. This article attempts to fill the gap. We focus on small firms whose access to capital markets may be limited and find evidence suggesting that firms use more trade credit when credit from financial institutions is unavailable. Suppliers lend to constrainedfirms because they have a comparative advantage in getting information about buyers, they can liquidate assets more efficiently, and they have an implicit equity stake in the firms. Finally, firms with better access to credit offer more trade credit.
We examine a novel, but economically important, characterization of trade credit relationships in which large investment-grade
buyers borrow from their smaller suppliers. Using a matched sample of large retail buyers and their much smaller suppliers,
we find that slower payment terms by large retailers are associated with lower investment at the supplier level. The effects
are sharpest during periods of tight bank credit and for firms which we might otherwise characterize as financially constrained.
The opportunity cost of extending credit to large buyers appears to be positive and sharply increasing in the financial frictions
facing a firm.
This paper empirically examines how close ties between a firm and its creditors affects the availability and the costs of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. We find that the primary benefit to a firm of building close ties with a creditor is that the availability of financing increases. We find no analogous effect on the price of credit. Attempts by a firm to widen its circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. An increase in the amount of potential competition in credit markets appears to destabilize relationships and reduces the availability of funds. In sum, we find that relationships are valuable and appear to operate primarily through quantities rather than prices.
We analyse for the first time whether trade credit provided an alternative source of external finance to SMEs during the credit crisis. Using firm level panel data on over 40,000 Spanish SMEs we find that credit constrained SMEs depend on trade credit, but not bank loans, to finance capital expenditures and that the intensity of this dependence increased during the financial crisis. Unconstrained firms, in contrast, are dependent on banks loans not trade credit. Overall, this suggests substitution between bank loans and trade credit that is conditional on the level of financing constraints and is more intense during the crisis. (100 words).
This paper investigates the impact of the global financial crisis on the allocation of credit to small and medium-sized enterprises (SMEs). Using samples of French SMEs from four industries, we found support for the prediction of the flight-to-quality hypothesis that in bad times, credit flows away from smaller constrained firms to larger, higher grade firms. We also examined the relation between bank credit and trade credit in terms of two hypotheses: the substitution hypothesis and the complementary hypothesis. The results of fixed effects panel regressions showed that trade credit for small firms during periods of tight money acts generally as complement rather than substitute to bank credit, thus providing empirical support for the redistribution view of trade credit.
Using euro area firm-level data since the recent financial crisis, we test whether bank-lending constrained small- and medium-sized enterprises (SMEs) are more likely to use or apply for alternative external finance including trade credit, informal lending, loans from other companies, market financing (issued debt or equity) and state grants. Our constraint indicators identify both credit-rationed firms and firms that self-ration due to high lending costs. We find that credit-rationed firms are more likely to use, and apply for trade credit. This increases with firm size and age. We also find that constrained firms are more likely to use informal lending or loans from other companies. but find no evidence that bank-constrained SMEs apply for, or use market finance. Smaller, self-rationing borrowers are more likely to apply for grant finance. Finally, we find that firms denied credit for working capital tend to turn to trade credit, while informal and inter-company lending tends to act as a substitute for bank investment loans.
In the last decade, a debate has resurfaced about whether financial constraints stemming from asymmetric information and incentive problems play an important role in propagating monetary policy shocks. This paper investigates the monetary transmission mechanism in the UK and its impact on the availability of bank credit to small and medium size firms.
The empirical specification is based on a disequilibrium model that allows for the possibility of transitory credit rationing. Sample firms are classified endogenously into ‘borrowing constrained’ and ‘borrowing unconstrained’. The analysis of credit rationing takes into account not only firm specific variables, but also important macroeconomic factors such as the prevailing monetary conditions and the stage of the business cycle.
We find that (i) firms’ assets play an important role as collateral in mitigating borrowing constraints; (ii) during periods of tight monetary conditions corporate demand for bank credit increases, whereas the supply of bank loans is reduced; (iii) to avoid bank credit rationing smaller companies increase their reliance on interfirm credit; (iv) the proportion of borrowing constrained firms is significantly higher during the recession years of the early 1990s than at other times.
Using a supplier–client matched sample, we study the effect of the 2007–2008 financial crisis on between-firm liquidity provision. Consistent with a causal effect of a negative shock to bank credit, we find that firms with high precrisis liquidity levels increased the trade credit extended to other corporations and subsequently experienced better performance as compared with ex ante cash-poor firms. Trade credit taken by constrained firms increased during this period. These findings are consistent with firms providing liquidity insurance to their clients when bank credit is scarce and offer an important precautionary savings motive for accumulating cash reserves.
The technological constraints on sustaining production chains have been discussed extensively by development economists, but the role of financial linkages has received less attention. In a model of recursive moral hazard for a manufacturing supply chain, we show that the structure of interlocking receivables and payables serve as the glue for the production chain that sustains complex manufacturing output. The inefficiency associated with recursive moral hazard can be mitigated through optimal delays in payments along the chain. However, efficiency requires large stocks of working capital, and invoice prices are high due to implicit amortization costs of inter-firm credit.
New data on the sources of finance for the non-financial corporate sector show that Italian firms as a whole use more equity finance than their Anglo-Saxon counterparts, and smaller Italian firms use equity more intensively than larger firms. Both findings can be understood in terms of the structure of industry and banking in Italy and the relations between them. Firm managers have considerable autonomy vis-à-vis both financial markets and intermediaries, and the Italian financial system should be seen as substantially different from either the high internal finance systems of the USA and the UK or the bank-based system of Japan.
We investigate how bank competition affects the efficiency of credit allocation, using a model of spatial competition. Our analysis shows that bad loans are more likely the larger the number of banks competing for customers. We study further how many banks will be active if market entry is not regulated. Free entry can induce too much entry and thus too many bad loans compared to the social optimum. Finally we analyse how bank competition affects the restructuring efforts of firms. We find that restructuring has positive externalities which give rise to multiple equilibria, with either much or little restructuring activity.
JEL classification: D43, G21, G34, L13, P31, P34.
The main objective of this paper is to extend the literature on the granting of trade credit. The focus is to test whether the accounts receivable decisions follow a model of partial adjustment. To do that, we use a sample of 2,922 Spanish SMEs. Using a dynamic panel data model and employing the GMM method of estimation we control for unobservable heterogeneity and for potential endogeneity problems. The results reveal that firms have a target level of accounts receivable and take decisions in order to achieve that level. In addition, we find that sales growth (if positive), the size of the firms, their capacity to generate internal funds and get short term financing, and economic growth are important in determining trade credit granted by firms.
We investigate the determinants of trade credit granted by suppliers in a historical environment which was characterized by high-information asymmetries and strong banks, focusing on the role of bank-firm relationships. Our results, which are based on a unique sample of 535 firm-year observations for 125 listed Belgian firms in four dominant industries in the period 1905 to 1909, are generally consistent with the financing role of trade credit. They suggest that trade credit was a tool for channelling funds from firms with close bank ties to other firms, which is consistent with findings for contemporary developing countries.
Trade credit is an important source of financing for intermediate purchasers of goods and services, and the accounts receivable created by trade credit sales constitute a significant fraction of the total assets of nonfinancial corporations: 26.5 percent of the total assets of manufacturing firms in 1981.1 Although trade credit plays such a large role in our economy, we have relatively little formal understanding of why and under what circumstances nonfinancial firms extend credit to their customers or how they establish the terms of sale. Two articles that address these questions may be viewed as the antecedents of the present paper. Schwartz [9] demonstrated that a seller with advantageous access to capital may profit by making trade credit loans to customers with disadvantageous access to capital. He then discussed trade credit's implications for macroeconomic policy issues such as monetary policy and price control. Lewel? len, McConnell, and Scott [6] demonstrated that trade credit cannot be used to increase firm value when the financial markets are perfect. In this situation, all credit terms that are acceptable to both the seller and the buyers are the presentvalue equivalent of cash terms. They concluded their paper, however, with the intriguing statement that there are financial market imperfections "that might impact the trade credit decision and allow an opportunity for the ingenious design of credit policy to affect firm value. The present conclusion, however, is that searches for an optimal policy need to be focused explicitly on the role of those imperfections, since a well-functioning capital market will obviate any of the stan?
I develop a conceptual framework for analyzing the effect of the availability of institutional loans on firms' demand for supplier (trade) finance. I test for the existence of credit constraints and their effect on corporate financing policies. My empirical results support the hypothesis that trade credit is taken up by firms as a substitute for institutional finance at the margin when they are credit constrained. Further, in line with studies on the credit channel of monetary policy transmission, I find an increased reliance on trade credit by financially constrained firms during periods of tight money. Copyright (c) 2007 Financial Management Association International.
This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow firms to access only financial markets or bank lending according to some net worth criterion. In our model we consider external finance from trade credit as an additional source of funding for firms that cannot obtain credit from banks. We predict that when monetary policy tightens there will be a reduction in bank lending relative to trade credit. This is confirmed with an empirical investigation of 16,000 UK manufacturing firms.
This paper studies the effect of financial crises on trade credit for a sample of 890 firms in six emerging economies. Although the provision of trade credit increases right after a crisis, it contracts in the following months and years. Firms that are financially more vulnerable to crises extend less trade credit to their customers. We argue that the decline in aggregate trade credit ratios is driven by the reduction in the supply of trade credit that follows a bank credit crunch, consistent with the “redistribution view” of trade credit provision, whereby bank credit is redistributed via trade credit from financially stronger firms to weaker firms.
Trade credit is an important source of finance for firms and has been well researched, but the focus has been on financial trade-offs. In this paper, we consider the trade-offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit. Our model identifies the response of accounts payable and accounts receivable to changes in the cost of inventories, profitability, risk and liquidity, and importantly, this influence operates through a production channel. Our results support the model and complement many existing studies focused on explaining the financial terms of trade credit.
Assuming that firms' suppliers are better able to extract value from the liquidation of assets in default and have an information advantage over other creditors, the paper derives six predictions on the use of trade credit. (1) Financially unconstrained firms (with unused bank credit lines) take trade credit to exploit the supplier's liquidation advantage. (2) If inputs purchased on account are sufficiently liquid, the reliance on trade credit does not depend on credit rationing. (3) Firms buying goods make more purchases on account than those buying services, while suppliers of services offer more trade credit than those of standardized goods. (4) Suppliers lend inputs to their customers but not cash. (5) Greater reliance on trade credit is associated with more intensive use of tangible inputs. (6) Better creditor protection decreases both the use of trade credit and input tangibility.
This article examines the role of relationship lending in small firm finance. It examines price and nonprice terms of bank lines of credit extended to small firms. The focus on bank lines of credit allows the examination of a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving the asymmetric information problems associated with financing small enterprises. The authors find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality. Copyright 1995 by University of Chicago Press.
This paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint
costs of exchange. In the formal analysis, uncertain delivery time is used to generate a demand by firms to hold inventories
of both goods and money. Trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present
in the exchange of goods. By forewarning both trading partners of the timing of money flows, credit permits a reduction in
precautionary money holdings and the more effective management of net money accumulations.
Italian firms are top users of trade credit in an international comparison. The paper offers some clues to the determinants of this stylized fact exploiting the answers of about 1900 manufacturing firms on a wide range of contractual features, separately for domestic and foreign customers. The main finding of the univariate analysis is that, with the almost totality of transactions made on credit, there is no evidence that this way of financing is more expensive than loans. An econometric investigation shows that discounts offered have the expected effect of reducing payment delays mostly for customers located abroad, where customary credit periods are shorter and creditors' rights protection is more effective. The result is consistent with the poor explanatory power of discounts received in regressions for the trade debt period of domestic firms.
This paper examines the role of relationship lending using a data set on small firm finance. The abilities to acquire private information over time about borrower quality and to use this information in designing debt contracts largely define the unique nature of commercial banking. Recently, a theoretical literature on relationship lending has appeared which provides predictions about how loan interest rates evolve over the course of a bank-borrower relationship. The study focuses on small, mostly untraded firms for which the bank-borrower relationship is likely to be important.
The authors examine lending under lines of credit (L/Cs), because the L/C itself represents a formalization of the relationship and the data are thus more "relationship-driven." They also analyze the empirical association between relationship lending and the collateral decision.
Using data from the National Survey of Small Business Finance, the authors find that borrowers with longer banking relationships pay a lower interest rate and are less likely to pledge collateral. Empirical results also suggest that banks accumulate increasing amounts of this private information over the duration of the bank-borrower relationship.
Asymmetric information between banks and firms can preclude financing of valuable projects. Trade credit alleviates this problem by incorporating in the lending relation the private information held by suppliers about their customers. Incentive compatibility conditions prevent collusion between two of the agents (e.g., the buyer and the seller) against the third (e.g., the bank). Consistent with the empirical findings of Petersen and Rajan (1995), firms without relationships with banks resort more to trade credit, and sellers with greater ability to generate cash lows provide more trade credit. Finally, small firms react to monetary contractions by using trade credit, consistent with the empirical results of Nilsen (1994). Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Financing through suppliers is a subject that has been little studied in the economic literature in general and in corporate finance in particular. Although several hypotheses have been put forward to explain the different reasons behind this phenomenon, trade credit is not based on a general theory.
This study provides empirical evidence about factors determining the use of trade credit for a sample of small and medium size firms, which are potentially the firms that would follow this financing route, since they are more rationed in credit markets. Using a panel of Canary-Island firms from 1990 to 1996, and by means of specifications with the system estimator, results reveal that trade credit leads to a reduction in asymmetric information between firms and their financial backers, as well as in transaction costs. Furthermore, we confirm the theory that companies with easier access to institutional finance act as a credit channel for those with greater difficulties to obtain external funds.
This article examines how in a context of limited enforceability of contracts suppliers may have a comparative advantage over
banks in lending to customers because they are able to stop the supply of intermediate goods. Suppliers may act also as liquidity
providers, insuring against liquidity shocks that could endanger the survival of their customer relationships. The relatively
high implicit interest rates of trade credit are the result of insurance and default premiums that are amplified whenever
suppliers face a relatively high cost of funds. I explore these effects empirically for a panel of UK firms. (JEL: G30, M130, D920)
Commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held. By offering trade credit, a seller can identify prospective defaults more quickl y than if financial institutions were the sole providers of short-ter m financing. The information is valuable in cases where a seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments. Copyright 1987 by American Finance Association.
The paper examines micro data on Italian manufacturing firms' inventory behaviour to test the Meltzer (1960) hypothesis according to which firms substitute bank credit with trade credit (TC) during money tightening. We find that inventory investment of Italian manufacturing firms is constrained by their availability of TC and that this effect more than doubles during monetary restrictions. As for the magnitude of the substitution effect, however, we find that it is not sizeable. This is in line with the micro theories of TC and the evidence on actual firm practices, according to which credit terms display modest variations over time. Copyright Banca Monte dei Paschi di Siena SpA, 2005