Abstract

http://ssrn.com/abstract=6887
 
 

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Trade Credit: Theories and Evidence


Mitchell A. Petersen


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Raghuram G. Rajan


University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)



Abstract:     
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 may have a better ability to liquidate goods, and they may have a greater implicit equity stake in the firm's long term survival. We find some evidence that trade credit is used as a means of price discrimination. Finally, we find that firms with better access to credit from financial institutions offer more trade credit. This supports the view that trade credit may be a channel through which monetary policy affects firms outside the banking system.

JEL Classification: G32

working papers series





Not Available For Download

Date posted: August 22, 1998  

Suggested Citation

Petersen, Mitchell A. and Rajan, Raghuram G., Trade Credit: Theories and Evidence. Available at SSRN: http://ssrn.com/abstract=6887

Contact Information

Mitchell A. Petersen (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1281 (Phone)
847-491-5719 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
847-467-1281 (Phone)
847-491-5719 (Fax)
Raghuram G. Rajan
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
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