How Do Firms Choose between Intermediary and Supplier Finance?

33 Pages Posted: 25 Aug 2008

See all articles by Christina Atanasova

Christina Atanasova

Simon Fraser University (SFU)

Dimitar Antov

Northwestern University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2008

Abstract

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

Atanasova, Christina and Antov, Dimitar, How Do Firms Choose between Intermediary and Supplier Finance? (August 25, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1255882 or http://dx.doi.org/10.2139/ssrn.1255882

Christina Atanasova (Contact Author)

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Dimitar Antov

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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