The Implications of Trade Credit for Bank Monitoring: Suggestive Evidence from Japan

27 Pages Posted: 6 May 2008

See all articles by Yoshiro Miwa

Yoshiro Miwa

Osaka Gakuin University

J. Mark Ramseyer

Harvard Law School

Abstract

Firms in modern developed economies borrow from both banks and trade partners. Using Japanese manufacturing data from the 1960s, we estimate the price of trade credit, and explore some of the ways firms choose between the credit and bank loans. We find that firms of all sizes borrow heavily from their trade partners, and at implicit rates that track the explicit rates banks would charge. They borrow from banks when they anticipate needing money for relatively long periods; they turn to trade partners when they face short-term unexpected exigencies. This apparent contrast in the term structures follows, we suggest, from the fundamentally different way bankers and trade partners cut default risk. Because bankers seldom know their borrowers' industries first hand, they rely on formal legal protection (like security interests). Because trade partners know the industry well, they reduce risk by monitoring their borrowers closely instead. Because the costs to creating legal mechanisms are heavily front-loaded, bankers focus on long-term debt; because the costs of monitoring debtors are ongoing, trade creditors do not. Apparently, banks monitor less than we have thought.

Suggested Citation

Miwa, Yoshiro and Ramseyer, J. Mark, The Implications of Trade Credit for Bank Monitoring: Suggestive Evidence from Japan. Journal of Economics & Management Strategy, Vol. 17, Issue 2, pp. 317-343, Summer 2008, Available at SSRN: https://ssrn.com/abstract=1128382 or http://dx.doi.org/10.1111/j.1530-9134.2008.00180.x

Yoshiro Miwa (Contact Author)

Osaka Gakuin University ( email )

2-36-1 Kishibe-Minami
Suita, Osaka 5645811
Japan

J. Mark Ramseyer

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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