Bank Loans vs. Trade Credit

24 Pages Posted: 7 Jun 2012

See all articles by Julan Du

Julan Du

The Chinese University of Hong Kong (CUHK) - Department of Economics

Zhigang Tao

The University of Hong Kong - School of Business

Yi Lu

National University of Singapore (NUS) - Department of Economics

Date Written: July 2012

Abstract

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

Du, Julan and Tao, Zhigang and Lu, Yi, Bank Loans vs. Trade Credit (July 2012). Economics of Transition, Vol. 20, Issue 3, pp. 457-480, 2012, Available at SSRN: https://ssrn.com/abstract=2079405 or http://dx.doi.org/10.1111/j.1468-0351.2012.00439.x

Julan Du

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Zhigang Tao

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China
(852) 2857-8223 (Phone)
(852) 2858-5614 (Fax)

Yi Lu

National University of Singapore (NUS) - Department of Economics ( email )

1 Arts Link, AS2 #06-02
Singapore 117570, Singapore 119077
Singapore
65-65166834 (Phone)

HOME PAGE: http://ylu6.weebly.com

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