In Kind Finance, Collateral and Cheap Trade Credit

47 Pages Posted: 21 Mar 2006

See all articles by Daniela Fabbri

Daniela Fabbri

University of Lausanne - Institute of Banking and Finance (IBF)

Anna Maria C. Menichini

Università degli Studi di Salerno; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Date Written: March 2006

Abstract

The paper investigates the determinants of trade credit demand and its interactions with the input combination of the firm, within an incomplete contract setting with uncertainty, two-input technology and collateralised credit contracts. Assuming that the supplier is better able to extract value from existing assets and that she has an information advantage relative to other creditors, the paper derives the following predictions: (1) financially unconstrained firms (with unused bank credit lines) take trade credit because it is in fact cheaper than bank loans; (2) the reliance on trade credit may be invariant to the degree of credit rationing, depending on product characteristics; (3) trade credit demand (supply) varies among firms using (producing) differentiated or standardised inputs, rather than services; (4) suppliers lend goods to their customers but they do not lend them cash; (5) a larger use of trade credit goes together with an input choice biased towards tangible assets; (6) both financing and input choices respond to changes in the degree of creditor protection.

Keywords: Trade Credit, Collateral, Financial Constraints, Asset Tangibility, Creditor Protection

JEL Classification: G32, G33, K22, L14

Suggested Citation

Fabbri, Daniela and Menichini, Anna Maria C., In Kind Finance, Collateral and Cheap Trade Credit (March 2006). EFA 2006 Zurich Meetings Paper, Available at SSRN: https://ssrn.com/abstract=891754 or http://dx.doi.org/10.2139/ssrn.891754

Daniela Fabbri (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

CH-1015 Lausanne
Switzerland
+41 21 692 3369 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: www.hec.unil.ch/dfabbri

Anna Maria C. Menichini

Università degli Studi di Salerno ( email )

via Giovanni Paolo II
Fisciano, Salerno 84084
Italy
+39 089 962174 (Phone)
+39 089 962049 (Fax)

HOME PAGE: http://www3.unisa.it/docenti/menichini/index

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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