IDEAS home Printed from https://ideas.repec.org/a/eee/quaeco/v51y2011i4p419-434.html
   My bibliography  Save this article

Trade credit versus bank credit: Evidence from corporate inventory financing

Author

Listed:
  • Yang, Xiaolou

Abstract

In this study, I introduce capital market imperfections into a structure framework of inventory investments and investigate impacts of trade credit on firms’ inventory dynamics and analyze the relationship between trade credit and bank loans. As a result, firms end up using a mix of trade credit and bank loans. I find that the use of trade credit and bank credit can be either complements or substitutes. During tight monetary periods, trade credit operates mainly as a substitute for bank borrowing while during looser monetary episodes even when the economy is weak, trade credit and bank loans are dominated by a complementary effect.

Suggested Citation

  • Yang, Xiaolou, 2011. "Trade credit versus bank credit: Evidence from corporate inventory financing," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 419-434.
    • Handle: RePEc:eee:quaeco:v:51:y:2011:i:4:p:419-434
    DOI: 10.1016/j.qref.2011.07.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S106297691100024X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.qref.2011.07.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    2. Guariglia, Alessandra, 2000. "Inventory Investment and Capital Market Imperfections: A Generalization of the Linear Quadratic Inventory Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 223-242, May.
    3. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    5. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
    6. R. Glenn Hubbard, 1995. "Is there a \\"credit channel\\" for monetary policy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
    7. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    8. Fuhrer, Jeffrey C. & Moore, George R. & Schuh, Scott D., 1995. "Estimating the linear-quadratic inventory model Maximum likelihood versus generalized method of moments," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 115-157, February.
    9. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    10. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
    11. Guariglia, Alessandra & Mateut, Simona, 2006. "Credit channel, trade credit channel, and inventory investment: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2835-2856, October.
    12. West, Kenneth D, 1986. "A Variance Bounds Test of the Linear Quadratic Inventory Model," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 374-401, April.
    13. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 197-222.
    14. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-253, February.
    15. Krane, Spencer D & Braun, Stephen N, 1991. "Production Smoothing Evidence from Physical-Product Data," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 558-581, June.
    16. Guido de Blasio, 2005. "Does Trade Credit Substitute Bank Credit? Evidence from Firm‐level Data," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(1), pages 85-112, February.
    17. Alessandra Guariglia, 2000. "Inventory Investment and Capital Market Imperfections: a Generalization ofthe Linear Quadratic Inventory Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 223-242, May.
    18. Love, Inessa & Preve, Lorenzo A. & Sarria-Allende, Virginia, 2007. "Trade credit and bank credit: Evidence from recent financial crises," Journal of Financial Economics, Elsevier, vol. 83(2), pages 453-469, February.
    19. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-864, September.
    20. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    21. Guariglia, Alessandra & Mateut, Simona, 2010. "Inventory investment, global engagement, and financial constraints in the UK: Evidence from micro data," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 239-250, March.
    22. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    23. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1993. "The Choice Between Public and Private Debt: An Analysis of Post-Deregulation Corporate Financing in Japan," NBER Working Papers 4421, National Bureau of Economic Research, Inc.
    24. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, University Library of Munich, Germany.
    25. Marion Kohler & Erik Britton & Tony Yates, 2000. "Trade credit and the monetary transmission mechanism," Bank of England working papers 115, Bank of England.
    26. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306, National Bureau of Economic Research, Inc.
    27. R. Glenn Hubbard, 1995. "Is there a \"credit channel\" for monetary policy?," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 63-77.
    28. Kashyap, Anil K & Wilcox, David W, 1993. "Production and Inventory Control at the General Motors Corporation during the 1920's and 1930's," American Economic Review, American Economic Association, vol. 83(3), pages 383-401, June.
    29. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    30. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    31. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters, in: Monetary Policy, pages 221-261, National Bureau of Economic Research, Inc.
    32. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
    33. Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
    34. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    35. Simon Gilchrist & Charles Himmelberg, 1999. "Investment: Fundamentals and Finance," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274, National Bureau of Economic Research, Inc.
    36. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-937.
    37. Whited, Toni M, 1992. "Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-1460, September.
    38. Mark T. Leary, 2009. "Bank Loan Supply, Lender Choice, and Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 64(3), pages 1143-1185, June.
    39. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    40. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1998. "Financing Constraints And Inventory Investment: A Comparative Study With High-Frequency Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 513-519, November.
    41. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, February.
    42. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guariglia, Alessandra & Mateut, Simona, 2006. "Credit channel, trade credit channel, and inventory investment: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2835-2856, October.
    2. Yang, Xiaolou, 2011. "The role of trade credit in the recent subprime financial crisis," Journal of Economics and Business, Elsevier, vol. 63(5), pages 517-529, September.
    3. Simona Mateut, 2005. "Trade Credit and Monetary Policy Transmission," Journal of Economic Surveys, Wiley Blackwell, vol. 19(4), pages 655-670, September.
    4. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    5. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    6. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory Investment, Internal-Finance Fluctuation, and the Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 75-138.
    7. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    8. Bougheas, Spiros & Mateut, Simona & Mizen, Paul, 2009. "Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 300-307, February.
    9. Mateut, Simona & Bougheas, Spiros & Mizen, Paul, 2006. "Trade credit, bank lending and monetary policy transmission," European Economic Review, Elsevier, vol. 50(3), pages 603-629, April.
    10. Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1795-1809, September.
    11. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, University Library of Munich, Germany.
    12. Paul Mizen & Cihan Yalcin, 2006. "Monetary Policy, Corporate Financial Composition and Real Activity," CESifo Economic Studies, CESifo, vol. 52(1), pages 177-213, March.
    13. Guariglia, Alessandra & Mateut, Simona, 2010. "Inventory investment, global engagement, and financial constraints in the UK: Evidence from micro data," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 239-250, March.
    14. Marian Rizov, 2008. "Corporate Capital Structure And How Soft Budget Constraints May Affect It," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 648-684, September.
    15. Saibal Ghosh, 2015. "Trade Credit, Bank Credit and Crisis: Some Empirical Evidence for India?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 9(4), pages 333-361, November.
    16. Durlauf, Steven N. & Maccini, Louis J., 1995. "Measuring noise in inventory models," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 65-89, August.
    17. Rose Cunningham, 2004. "Finance Constraints and Inventory Investment: Empirical Tests with Panel Data," Staff Working Papers 04-38, Bank of Canada.
    18. Valentina Peruzzi, 2017. "Does family ownership structure affect investment-cash flow sensitivity? Evidence from Italian SMEs," Applied Economics, Taylor & Francis Journals, vol. 49(43), pages 4378-4393, September.
    19. Yang, Junhong & Guariglia, Alessandra & Peng, Yuchao & Shi, Yukun, 2022. "Inventory investment and the choice of financing: Does financial development play a role?," Journal of Corporate Finance, Elsevier, vol. 74(C).
    20. Greenaway, David & Guariglia, Alessandra & Kneller, Richard, 2007. "Financial factors and exporting decisions," Journal of International Economics, Elsevier, vol. 73(2), pages 377-395, November.

    More about this item

    Keywords

    Trade credit; Bank loans; Inventory financing;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:51:y:2011:i:4:p:419-434. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620167 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.