Trade Credit, Bank Loans, and Monitoring: Evidence from Japan

49 Pages Posted: 7 Nov 2005

See all articles by Yoshiro Miwa

Yoshiro Miwa

Osaka Gakuin University

J. Mark Ramseyer

Harvard Law School

Date Written: October 2005

Abstract

Firms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect.

This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little.

JEL Classification: G21, G32

Suggested Citation

Miwa, Yoshiro and Ramseyer, J. Mark, Trade Credit, Bank Loans, and Monitoring: Evidence from Japan (October 2005). Harvard Law and Economics Discussion Paper No. 527. Available at SSRN: https://ssrn.com/abstract=843526 or http://dx.doi.org/10.2139/ssrn.843526

Yoshiro Miwa

Osaka Gakuin University ( email )

2-36-1 Kishibe-Minami
Suita, Osaka 5645811
Japan

J. Mark Ramseyer (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-4878 (Phone)
617-496-6118 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
293
Abstract Views
1,812
rank
103,386
PlumX Metrics