Funding Liquidity Without Banks: Evidence from a Shock to the Cost of Very Short-Term Debt
58 Pages Posted: 13 Feb 2017 Last revised: 1 Jul 2019
Date Written: June 18, 2019
In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short-term bank credit more than long-term credit. Firms responded by cutting short-term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.
Keywords: Short term debt, liquidity, trade credit, bank loans, cost of debt
JEL Classification: H25, H32, G21, G32
Suggested Citation: Suggested Citation