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Trade Credit and Credit Rationing in Canadian Firms

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  • Rose Cunningham

Abstract

Burkart and Ellingsen's (2004) model of trade credit and bank credit rationing predicts that trade credit will be used by medium-wealth and low-wealth firms to help ease bank credit rationing. The author tests these and other predictions of Burkart and Ellingsen's model using a large sample of more than 28,000 Canadian firms. She uses an endogenous method to divide the firms into the appropriate wealth categories, rather than arbitrarily selecting firms likely to be credit rationed. The data support the main predictions of Burkart and Ellingsen's model quite well. The author finds that medium-wealth firms substitute trade credit for bank credit consistent with using it to alleviate bank credit rationing. The low-wealth firms use trade credit, but it is positively linked to their bank credit, which suggests that those firms are constrained in both bank credit and trade credit markets, and so cannot use trade credit to adjust as much to negative shocks. The findings also suggest that there are very few unconstrained, high-wealth Canadian firms. The author also finds that low-wealth, declining, and distressed firms supply proportionally more trade credit than firms that have healthier balance sheets. This is surprising, but has been found in earlier studies as well. It may reflect some exploitation of market power by the customers of such firms.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 04-49.

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Length: 38 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:bca:bocawp:04-49

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Keywords: Financial markets; Credit and credit aggregates;

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References

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  1. Emery, Gary W., 1984. "A Pure Financial Explanation for Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 271-285, September.
  2. Mitchell A. Petersen & Raghuram G. Rajan, . "Trade Credit: Theories and Evidence," CRSP working papers 322, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-53, February.
  4. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-23, July.
  5. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
  6. 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.
  7. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
  8. Bruce E. Hansen, 1996. "Sample Splitting and Threshold Estimation," Boston College Working Papers in Economics 319., Boston College Department of Economics, revised 12 May 1998.
  9. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank.
  10. Jain, Neelam, 2001. "Monitoring costs and trade credit," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 89-110.
  11. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
  12. 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, 02.
  13. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
  14. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May.
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Cited by:
  1. 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.
  2. Ono, Masanori, 2009. "Trading companies as financial intermediaries in Japan," MPRA Paper 17331, University Library of Munich, Germany.

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