Bank Loans vs. Trade Credit
24 Pages Posted: 7 Jun 2012
Date Written: July 2012
Using a World Bank dataset of Chinese firms, we investigate the relative importance of bank loans and trade credit in promoting firm performance. To deal with possible endogeneity issues, we employ distinct and separable instrumental variables for bank loans and trade credit. We find that access to bank loans is central to improving firm performance and growth, while the availability of trade credit is much less important. Our results suggest that trade credit cannot effectively substitute for bank loans. Overall, our findings suggest the need for further development of China's formal financial institutions, which would enable the non‐state sector to grow much faster than it has grown in recent decades.
Keywords: Bank loans, trade credit, firm performance, firm growth
JEL Classification: G32, O16, O17, P34
Suggested Citation: Suggested Citation