Abstract

http://ssrn.com/abstract=843526
 
 

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Trade Credit, Bank Loans, and Monitoring: Evidence from Japan


Yoshiro Miwa


Osaka Gakuin University

J. Mark Ramseyer


Harvard Law School

October 2005

Harvard Law and Economics Discussion Paper No. 527

Abstract:     
Firms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect.

This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little.

Number of Pages in PDF File: 49

JEL Classification: G21, G32

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Date posted: November 7, 2005  

Suggested Citation

Miwa, Yoshiro and Ramseyer, J. Mark, Trade Credit, Bank Loans, and Monitoring: Evidence from Japan (October 2005). Harvard Law and Economics Discussion Paper No. 527. Available at SSRN: http://ssrn.com/abstract=843526 or http://dx.doi.org/10.2139/ssrn.843526

Contact Information

Yoshiro Miwa
Osaka Gakuin University ( email )
2-36-1 Kishibe-Minami
Suita, Osaka 5645811
Japan
J. Mark Ramseyer (Contact Author)
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-4878 (Phone)
617-496-6118 (Fax)
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