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Additional Evidence On The Use Of Trade Credit By Small Firms
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Book Synopsis Additional Evidence on the Use of Trade Credit by Small Firms by : Morris G. Danielson
Download or read book Additional Evidence on the Use of Trade Credit by Small Firms written by Morris G. Danielson and published by . This book was released on 2014 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses firm-level data from the 1995 Credit, Banks and Small Business Survey, conducted by the National Federation of Independent Business, to analyze the role of trade credit in the financing of small businesses. A unique attribute of this data set is that it can distinguish between the perceived importance of trade credit to a firm, and the percent of purchases the firm makes on credit. As in previous studies, we find that trade credit use is, at least partially, the result of credit rationing. We extend previous studies by giving a more in-depth analysis of the role played by trade credit discounts. Firms facing credit rationing are less likely to take trade credit discounts, suggesting that credit rationing imposes costs on a firm. Across the entire sample, though, firms that rank trade credit as an important source of funds take discounts as frequently as do other firms. In addition, those firms that have the most discounts available also take discounts more frequently than do other firms. These results suggest that small firms recognize the high cost of foregone discounts, and attempt to avoid these costs.
Book Synopsis Trade credit, financial intermediary development, and industry growth by : Raymond Fisman
Download or read book Trade credit, financial intermediary development, and industry growth written by Raymond Fisman and published by World Bank Publications. This book was released on 2001 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Where do firms turn for financing in countries with poorly developed financial markets? One source is trade credit. And where formal financial intermediaries are deficient, industries that rely more on this source of financing grow faster.
Book Synopsis Trade Credit by : Mitchell A. Petersen
Download or read book Trade Credit written by Mitchell A. Petersen and published by . This book was released on 2008 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short term trade credit may be routinely used to minimize transactions costs, medium term borrowing against trade credit is a form of financing of last resort. Suppliers lend to firms no one else lends to because they may have a comparative advantage in getting information about buyers cheaply, they have a better ability to liquidate goods, and they have a greater implicit equity stake in the firm's long term survival. We find some evidence consistent with the use of trade credit as a means of price discrimination. Finally, we find that firms with better access to credit from financial institutions offer more trade credit. This suggests that firms may intermediate between institutional creditors and other firms who have limited access to financial institutions.
Book Synopsis Trade Credit and the Effect of Macro-Financial Shocks by : Mr.Yungsan Kim
Download or read book Trade Credit and the Effect of Macro-Financial Shocks written by Mr.Yungsan Kim and published by International Monetary Fund. This book was released on 2003-06-01 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many studies examine why firms are financed by their suppliers, but few empirical studies look at the macroeconomic implications of such financial arrangements. Using disaggregated panel data, we examine how firms extend and use trade credit. We find that, controlling for the transactions or asset management motive, both accounts payable and receivable increase with tighter policy, implying that trade credit helps firms absorb the effect of a credit contraction. A comparison of S&P 500 firms with smaller firms, however, provides no evidence that when policy is tightened, large firms play the role of credit suppliers more actively than small firms.
Book Synopsis Customer Market Power and the Provision of Trade Credit by : Neeltje van Horen
Download or read book Customer Market Power and the Provision of Trade Credit written by Neeltje van Horen and published by World Bank Publications. This book was released on 2007 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Statistics show that the sale of goods on credit is widespread among firms even when they are capital constrained and thus face relatively high costs in providing trade credit. This study provides an explanation for this by arguing that customers who possess strong market power are able to increase their customer surplus by demanding to purchase the goods on credit. This gain in customer surplus increases with the degree of asymmetric information between buyer and seller with respect to product quality. Therefore, firms that are perceived as risky are especially subject to the market power of the customer and have to sell their goods on credit. Using detailed firm-level data from a large number of firms in Eastern Europe and Central Asia, this study finds evidence consistent with this hypothesis. It finds a strong positive correlation between customer market power and trade credit provision. Furthermore, this relationship is especially strong when the supplier is more risky and in countries with limited financial sector development or a weak legal system.
Book Synopsis The Oxford Handbook of Entrepreneurial Finance by : Douglas Cumming
Download or read book The Oxford Handbook of Entrepreneurial Finance written by Douglas Cumming and published by OUP USA. This book was released on 2012-03-22 with total page 937 pages. Available in PDF, EPUB and Kindle. Book excerpt: Provides a comprehensive picture of issues dealing with different sources of entrepreneurial finance and different issues with financing entrepreneurs. The Handbook comprises contributions from 48 authors based in 12 different countries.
Book Synopsis When Trade Credit Facilitates Access to Bank Finance by : Eric Severin
Download or read book When Trade Credit Facilitates Access to Bank Finance written by Eric Severin and published by . This book was released on 2004 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Trade Credit and Bank Credit by : Inessa Love
Download or read book Trade Credit and Bank Credit written by Inessa Love and published by World Bank Publications. This book was released on 2005 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The authors study the effect of financial crises on trade credit in a sample of 890 firms in six emerging economies. They find that although provision of trade credit increases right after the crisis, it consequently collapses in the following months and years. The authors observe that firms with weaker financial position (for example, high pre-crisis level of short-term debt and low cash stocks and cash flows) are more likely to reduce trade credit provided to their customers. This suggests that the decline in aggregate credit provision is driven by the reduction in the supply of trade credit, which follows the bank credit crunch. The results are consistent with the "redistribution view" of trade credit provision, in which bank credit is redistributed by way of trade credit by the firms with stronger financial position to the firms with weaker financial stand "--World Bank web site.
Book Synopsis Small-business Access to Trade Credit by : Daniel Aaronson
Download or read book Small-business Access to Trade Credit written by Daniel Aaronson and published by . This book was released on 2000 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays in Trade Credit and International Trade by : Santiago Justel
Download or read book Essays in Trade Credit and International Trade written by Santiago Justel and published by . This book was released on 2020 with total page 217 pages. Available in PDF, EPUB and Kindle. Book excerpt: When a buyer and a seller meet in the market, both need to decide quantity and price. However, often they also argue when to transfer the payment. In one extreme, the seller may demand early payment before delivering the goods. In the other, the buyer can demand late payment after receiving the products/services. The former is sometimes called cash in advance, while the latter is called trade credit. Understanding the use of trade credit is essential because it is one of the main sources of short-term finance for firms. Additionally, since each trade contract specifies prices, quantities, and payment delay, the contract is implicitly defining who is responsible for financing the production and who bears the risk of default, which can itself be a deterrent to trade. My dissertation aims to study some of the novel factors that shape the use of trade credit and shed some light on its effects on a firm's decision to trade. The first chapter studies the firm-characteristics that shape the use of trade credit decisions in international trade. Trade credit is widely used in firm-to-firm transactions, domestically, and internationally. The literature has found that country-specific features, such as interest rates, legal institutions, the rule of law, and capital controls, affect the decision to extend trade credit. The literature has not studied additional features that might explain the trade credit provision in the international context; it also has not proposed additional theories. To fill this gap, I exploit transaction-level data from Chilean customs. This data set, available for exporters and importers, includes information that describes if a given transaction was paid in advance or paid post-shipment (trade credit). Additionally, I merge this data with firm-level details provided by the Chilean Internal Tax Service. Using this data, I document new facts. Namely, large firms measured by several metrics are most likely to use trade credit compared to small firms. Motivated by these facts and to guide my empirical strategy, I propose a theory for the use of trade credit. The model has the critical assumption that firms, buyer and seller, may default on their contracts due to liquidity shocks. Depending on the size of the shock, the firm can deplete all its assets, which means it will default. This simple assumption will imply that larger firms will be less likely to default since they have enough assets to absorb the liquidity shock. The predictions of the model are confirmed using regression analysis; therefore, not only country-specific attributes but also firm characteristics affect the contract decision: large exporters (importers) are 15% (40%) more likely to sell (buy) under trade credit compared to small exporters (importers). I also find that a small exporter matched with a large importer is 3-10% more likely to sell under trade credit. In the second chapter, we propose a theory for the use of trade credit that connects the markup that the exporter charges to the decision of extending trade credit. The key idea is that under pre-payment, the buyer needs to pay the full amount to the seller before receiving the goods. This payment requires liquidity equal to the total invoice, which in turn corresponds to the production cost plus a markup. In contrast, extending trade credit might be cheaper since the seller only needs to cover its production costs in advance, which is lower than the intermediate price due to the presence of markups. If financial intermediation is costly and the lending interest rate is greater than the deposit rate, then this difference in liquidity needs between pre-payment and trade credit affects profits, affecting the decision to provide trade credit. We test the implications of the theory using Chilean data. First, we construct markup estimates at the firm-product level, using detailed data on inputs and outputs of Chilean plants using the methodology developed by De Loecker, Goldberg, Khandelwal, and Pavcnik (2016). We then use transaction-level Customs data with information on the payment choice to test the model's predictions. We find that trade credit use increases in the markup and that this effect is larger, the bigger the difference between the buyer's borrowing rate and the seller's deposit rate is. the final chapter proposes and tests an alternative theory. Trade credit is used as a quality guarantee. There are two main facts in existing theories that explain the use of trade credit. First, all these theories focus on explaining the extension of trade credit or not, but not the length of the contract. Secondly, and most importantly, some empirical evidence does not speak to these models. Particularly, most of the existing theories conclude that trade credit is used due to access to cheaper credit or as an enforcement mechanism, then restricting the credit period, say to 30 days maximum, should not alter those incentives. However, the finance literature has found that this type of regulation has effects on the economy. Some authors have found that limiting the trade credit period to 30 days has positive effects, from the seller's perspective, through more competition due to the increase in firm entrance and a decrease in exit rates. However, in the same literature, other papers have shown that these laws also have adverse effects, namely, a reduction in the likelihood and volume of trade. The previous evidence indicates that the length of trade credit is also essential to understand the decision and its impact on the firm's behavior. Following Long, Malitz, and Ravid (1993), I propose the theory that trade credit serves as a signal for the quality of the product. In a nutshell, the model assumes that when the quality is not observable, but verifiable ex-post, trade credit can serve as a signal of the product's quality. The logic of the theory is that a buyer will not pay the transaction until she is sure that what she bought is what was agreed upon. Additionally, in this model, trade credit maturity serves a quality guarantee. Longer maturities imply that the buyer has more time to verify the contracted quality. This theory has the main prediction that the provision and maturity of the trade credit are positively related to the quality of the product. To test these predictions, I use a data set from the Chilean Customs. This transaction-level data set has a unique feature: the number of days at which a transaction was paid, on the addition of the usual measures such as destination, price, and quantity. As for quality measures, I will follow two strategies. First, I will use an off-the-shelf methodology that infers quality from prices and quantities, assuming a particular demand elasticity. Secondly, I will focus my attention on a specific industry, wine. For wine, I web-scrapped information of ratings, awards, and retail prices under the assumption that this data captures wine quality. The data confirms the main predictions of the model. I find that high-quality goods are more likely to be sold under trade credit. Moreover, regarding the other predictions, I find that high-quality products have 20 more days of trade credit, out of an average of 100 days.
Book Synopsis Does Trade Credit Substitute Bank Credit? Evidence From Firm-Level Data by : Mr.Guido De Blasio
Download or read book Does Trade Credit Substitute Bank Credit? Evidence From Firm-Level Data written by Mr.Guido De Blasio and published by International Monetary Fund. This book was released on 2003-08-01 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper examines micro data on Italian manufacturing firms' inventory behavior to test the Meltzer (1960) hypothesis according to which firms substitute trade credit for bank credit during periods of monetary tightening. It finds that their inventory investment is constrained by the availability of trade credit. As for the magnitude of the substitution effect, however, this study finds that it is not sizable. This is in line with the micro theories of trade credit and the evidence on actual firm practices, according to which credit terms display modest variations over time.
Book Synopsis Supplier Relationships and Small Business Use of Trade Credit by : Daniel Aaronson
Download or read book Supplier Relationships and Small Business Use of Trade Credit written by Daniel Aaronson and published by . This book was released on 2000 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Trade Credit and Bank Credit by : Inessa Love
Download or read book Trade Credit and Bank Credit written by Inessa Love and published by World Bank Publications. This book was released on 2005 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The authors study the effect of financial crises on trade credit in a sample of 890 firms in six emerging economies. They find that although provision of trade credit increases right after the crisis, it consequently collapses in the following months and years. The authors observe that firms with weaker financial position (for example, high pre-crisis level of short-term debt and low cash stocks and cash flows) are more likely to reduce trade credit provided to their customers. This suggests that the decline in aggregate credit provision is driven by the reduction in the supply of trade credit, which follows the bank credit crunch. The results are consistent with the "redistribution view" of trade credit provision, in which bank credit is redistributed by way of trade credit by the firms with stronger financial position to the firms with weaker financial stand "--World Bank web site.
Book Synopsis The Demand for Trade Credit by : Gregory E. Elliehausen
Download or read book The Demand for Trade Credit written by Gregory E. Elliehausen and published by . This book was released on 1993 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Availability of Firms' Information and Their Choice of External Credit by : Wako Watanabe
Download or read book Availability of Firms' Information and Their Choice of External Credit written by Wako Watanabe and published by . This book was released on 2004 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The main purpose of this paper is to present the empirical findings derived from the data of small firms that the availability of private and public information on the borrowing firm leads to diverse borrowing patterns among firms. Exploring logit models to characterize the firm's choice of a financial source, we find that firms whose information is poorly recorded, or who are publicly less recognized, are more likely to choose institutional lending over trade credit but as the recorded information becomes more organized and firms become more transparent, they tend to graduate to a greater use of trade credit.
Book Synopsis Bank Credit and Trade Credit by : Gerard McGuinness
Download or read book Bank Credit and Trade Credit written by Gerard McGuinness and published by . This book was released on 2016 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses panel data to test the extent to which trade credit has acted as a substitute for bank finance in Small and Medium Sized Enterprises (SMEs), in the aftermath of the financial crisis of 2008. It demonstrates that the reduction in the supply of funds to SMEs was compounded by the contraction of net trade credit within the sector. Nevertheless, trade credit played a vital role in the adjustment of the sector by easing the burden of financial crisis for some SMEs. Thus, the relative importance of trade credit increased for financially 'vulnerable' SMEs that were less liquid, highly dependent on short-term bank finance, and with a higher proportion of intangible assets, when entering the crisis. In terms of a redistribution effect; financially stronger firms extended relatively more trade credit, most likely, to financially vulnerable SMEs in aftermath of the financial crisis. In addition, the analysis demonstrates that the financial position of SMEs entering the crisis was more important in determining the impact of the financial crisis on trade credit than company characteristics of age and size.
Book Synopsis Bank Debt and Trade Credit for SMEs by : Guillaume Andrieu
Download or read book Bank Debt and Trade Credit for SMEs written by Guillaume Andrieu and published by . This book was released on 2015 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the links between firm age, firm size and the ability to obtain capital in a sample of European SMEs. The results indicate that age and size are positively linked to debt capacity. Furthermore, our analysis reveals that it is crucial to distinguish between bank debt financing and trade credit. Young and small firms are more subject to denial due to the higher moral hazard they represent for a bank. Only very young firms are more constrained for trade credit. The results of simultaneous analysis show that trade credit is positively related to bank credit financing, thus providing empirical support for the complementarity of these forms of financing.