How Do Firms Choose between Intermediary and Supplier Finance?
33 Pages Posted: 25 Aug 2008
Date Written: August 25, 2008
We examine the dynamics of firm's short-term financing choice between intermediated loans and trade credit. We argue that for firms with high agency costs, trade credit facilitates the access to and improves the terms of conventional loans. We model the idea that trade credit is a positive signal of the creditworthiness of the borrower. Hence, firms will choose to borrow from both intermediaries and trading partners. We report empirical evidence that firms with high agency costs rely heavily on supplier financing. For small firms, one standard deviation increase in the ratio of trade credit to total assets implies a 2.6% increase in the ratio of bank debt to total assets, which is large and economically significant relative to the mean of 15%. For young and risky firms trade credit also has a significant positive effect on the level of intermediated borrowing.
Keywords: Trade credit, Signalling, Panel data
JEL Classification: G32, G21
Suggested Citation: Suggested Citation