Substitution Effects in Private Debt: Evidence from SMEs
51 Pages Posted: 15 Mar 2015 Last revised: 2 Aug 2016
Date Written: August 1, 2016
We investigate whether SMEs with demand for debt finance increase trade credit when they experience a negative shock to bank credit. We base our analysis on a large sample of SMEs from the five biggest EU countries. First, SMEs’ ability to substitute largely depends on their credit quality. Second, substitution decreases during the financial crisis of 2007-09. Third, high credit quality firms with intermediate financial constraints are the most likely to substitute. We confirm these results on a subsample with matched bank-firm data. The evidence suggests that substitution in private debt is more difficult than considered in prior research.
Keywords: Bank loans, trade credit, asymmetric information, financial constraints, external finance dependence, financial crisis
JEL Classification: G1, G20, G30, G32
Suggested Citation: Suggested Citation