Substitution Effects in SME finance
50 Pages Posted: 15 Mar 2015 Last revised: 20 Dec 2018
Date Written: March 20, 2018
We investigate whether SMEs with demand for credit increase their trade credit usage after they experience a negative shock to bank credit. We base our analysis on a large sample of SMEs from the five biggest European 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 moderate financial constraints are the most likely to substitute. We confirm these results on a subsample with matched bank-firm data. The evidence highlights the limits of substitution in SME finance.
Keywords: Bank loans, trade credit, asymmetric information, financial constraints, external finance dependence
JEL Classification: G1, G20, G30, G32
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