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Counter-cyclical substitution between trade credit and bank credit

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  • Huang, Hui
  • Shi, Xiaojun
  • Zhang, Shunming

Abstract

This paper explores the substitution relationship between trade credit and bank credit, and its counter-cyclic dynamic pattern through economic cycles. We propose a new theoretical model, using a mechanism design method, which predicts the substitution between the two credits and its counter-cyclic behavior, subject to the condition of technological efficiency not less than one. This model also helps explain the somewhat contradictory evidence in the literature, on the relationship between the two credits. We present empirical evidence on the substitution effect and its counter-cyclic behavior, by using a balanced panel data set of 284 listed Chinese companies for the period 1998-2006. We further find that the substitution behaves counter-cyclically with respect to the coincident macroeconomic indicator, namely, GDP. Our empirical analysis also has some new features such as treating endogeneity carefully and incorporating the lag-effect of trade credit coherently.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 8 (August)
Pages: 1859-1878

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:8:p:1859-1878

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Trade credit Bank credit Substitution Counter-cyclicality;

References

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Citations

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Cited by:
  1. Min Zhang & Lijun Ma & Jun Su & Wen Zhang, 2014. "Do Suppliers Applaud Corporate Social Performance?," Journal of Business Ethics, Springer, vol. 121(4), pages 543-557, June.
  2. Alessandra Guariglia & Simona Mateut, . "Political affiliation and trade credit extension by Chinese firms," Discussion Papers 11/12, University of Nottingham, GEP.
  3. Mariarosaria Agostino & Francesco Trivieri, 2014. "Does trade credit play a signalling role? Some evidence from SMEs microdata," Small Business Economics, Springer, vol. 42(1), pages 131-151, January.

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