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How Do Small Businesses Finance their Growth Opportunities? – The Case of Recovery from the Lost Decade in Japan?

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  • Daisuke Tsuruta

    (National Graduate Institute for Policy Studies)

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    Abstract

    We investigate the financial resources used by small businesses in Japan during the period of recovery from a severe recession. Unlike large listed firms, small businesses cannot easily issue commercial debt or equity. Therefore, small businesses largely depend on trade credit and bank loans. Many previous studies argue that bank loans are cheaper than trade credit; so many firms (particularly unconstrained firms) use bank loans, especially in financially developed economies. However, the Japanese evidence does not support this view. First, small businesses with higher credit demand increase trade credit more during the period of the recovery from a severe recession. Second, creditworthy firms (for example, firms with more collateral assets) also increase trade credit to finance their growth opportunities. Third, firms in unstable industries increase trade credit more. This suggests that suppliers are able to offer credit, unlike banks, as they have a relative advantage in day-by-day monitoring.

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    Bibliographic Info

    Paper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 09-19.

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    Length: 50 pages
    Date of creation: Jan 2010
    Date of revision:
    Handle: RePEc:ngi:dpaper:09-19

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    1. Giuseppe Marotta, 1997. "Does trade credit redistribution thwart monetary policy? Evidence from Italy," Applied Economics, Taylor & Francis Journals, vol. 29(12), pages 1619-1629.
    2. Jeffrey H. Nilsen, 1999. "Trade Credit and the Bank Lending Channel," Working Papers 99.04, Swiss National Bank, Study Center Gerzensee.
    3. 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.
    4. Yoshiro Miwa & J. Mark Ramseyer, 2008. "The Implications of Trade Credit for Bank Monitoring: Suggestive Evidence from Japan," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(2), pages 317-343, 06.
    5. Vicente Cuñat, 2002. "Trade credit: Suppliers as debt collectors and insurance providers," Economics Working Papers 625, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2004.
    6. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
    7. Mike Burkart & Tore Ellingsen, 2002. "In-kind finance," LSE Research Online Documents on Economics 24940, London School of Economics and Political Science, LSE Library.
    8. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, 02.
    9. 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.
    10. Choi, Woon Gyu & Kim, Yungsan, 2005. "Trade Credit and the Effect of Macro-Financial Shocks: Evidence from U.S. Panel Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(04), pages 897-925, December.
    11. Ge, Ying & Qiu, Jiaping, 2007. "Financial development, bank discrimination and trade credit," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 513-530, February.
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