How Do Firms Choose between Intermediary and Supplier Finance?
52 Pages Posted: 12 Dec 2007
We examine the dynamics of firm's choice of short-term financing between intermediated loans and trade credit. We argue that trade credit facilitates the access to and improves the terms of conventional loans. We model the idea that trade credit is a favorable signal of the creditworthiness of the borrower. Hence, some firms will use trade credit in addition to conventional institutional loans despite its higher cost. Our empirical results support the predictions of the theoretical model we develop. We show that firms with high agency costs rely heavily on supplier financing. For these firms trade credit has a significant positive effect on the level of intermediated borrowing.
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