Trade Credits and Bank Credits in International Trade: Substitutes or Complements?

34 Pages Posted: 22 Nov 2014

See all articles by Martina Engemann

Martina Engemann

University of Munich/LMU

Katharina Eck

Technische Universität München (TUM)

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 2014

Abstract

Trade credits are an important financing tool for internationally active firms. This is surprising, as trade credits are generally more expensive than bank credits and thus a costly substitute for bank financing. In this paper, we investigate the relation between trade credits and bank credits for exporting firms. We develop a theoretical model and show that trade credits convey a quality signal which reduces the risk of the transaction and may thus facilitate obtaining additional bank credits. Hence, exporters who are not able to obtain bank credits in the first place use trade credits and bank credits complementarily. Using panel data on large German manufacturing firms, we provide supportive evidence for our theoretical predictions. In general, trade credits and bank credits are substitutes. For financially constrained exporters, the overall substitution effect is attenuated which is consistent with a positive signalling effect.

Suggested Citation

Engemann, Martina and Eck, Katharina and Schnitzer, Monika, Trade Credits and Bank Credits in International Trade: Substitutes or Complements? (November 2014). The World Economy, Vol. 37, Issue 11, pp. 1507-1540, 2014. Available at SSRN: https://ssrn.com/abstract=2529516 or http://dx.doi.org/10.1111/twec.12167

Martina Engemann (Contact Author)

University of Munich/LMU ( email )

Akadmiestrasse 1
Munich, 80799
Germany

Katharina Eck

Technische Universität München (TUM)

Arcisstrasse 21
Munich, DE 80333
Germany

Monika Schnitzer

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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