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Trade Credit, Collateral Liquidation and Borrowing Constraints

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Abstract

The paper proposes a model of collateralized bank and trade credit. Firms use a two-input technology. Assuming that the supplier is better able to extract value from existing assets and has an information advantage over other creditors, the paper derives a series of predictions. (1) Financially unconstrained firms (with unused bank credit lines) take trade credit for a liquidation motive. (2) The reliance on trade credit does not depend on credit rationing, if inputs are liquid enough. (3) Firms buying goods make more purchases on account than those buying services, while suppliers of services offer more trade credit than those of standardized goods. (4) Suppliers lend inputs to their customers but not cash. (5) Greater reliance on trade credit is associated with more intensive use of tangible inputs. (6) Better creditor protection decreases both the use of trade credit and input tangibility.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 146.

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Date of creation: 01 Nov 2005
Date of revision: 08 Feb 2009
Handle: RePEc:sef:csefwp:146

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Keywords: trade credit; collateral; financial constraints; asset tangibility; creditor protection ibility;

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References

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  1. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank.
  2. Lee, Yul W. & Stowe, John D., 1993. "Product Risk, Asymmetric Information, and Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(02), pages 285-300, June.
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Cited by:
  1. Daniela Fabbri & Annamaria Menichini, 2012. "The Commitment Problem of Secured Lending," CSEF Working Papers 318, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Leora F. Klapper & Luc Laeven & Raghuram Rajan, 2011. "Trade Credit Contracts," NBER Working Papers 17146, National Bureau of Economic Research, Inc.
  3. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., . "Trade Credit and Taxes," Working Papers 631, Research Seminar in International Economics, University of Michigan.
  4. Simona Mateut, . "Reverse trade credit - the use of prepayments by French firms," Discussion Papers 11/12, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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