Trade debts and bank lending in years of crisis

This paper provides an empirical investigation of the substitution hypothesis between trade indebtedness and bank loans, based on a sample of 245,000 Italian firms for the period 2010-15, when episodes of bank credit contraction occurred. The econometric approach is based on a shift-and-share IV strategy aimed at isolating the causal effect of bank credit supply shocks on trade indebtedness. We find a significant negative elasticity of trade debt to bank loans, consistent with the pecking order theory, according to which firms prefer bank debt to (more costly) trade debt and an exogenous reduction in the former spurs the use of the latter. This substitution allows firms to rebalance their financial structure, thus increasing their resilience to external credit shocks. However, we find heterogeneity at geographical level: a significant substitution effect is estimated only for Central and Northern firms; in the South and Islands the financial structure of firms, which tend to rely more on trade debt, consequently appears more vulnerable to external credit shocks. Heterogeneity also seems to occur along other dimensions, suggesting no significant substitutability for smaller, riskier and highly leveraged firms.