Trade Credit, Collateral Liquidation and Borrowing Constraints
AbstractThe 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 InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 146.
Date of creation: 01 Nov 2005
Date of revision: 08 Feb 2009
trade credit; collateral; financial constraints; asset tangibility; creditor protection ibility;
Other versions of this item:
- Fabbri, Daniela & Menichini, Anna Maria C., 2010. "Trade credit, collateral liquidation, and borrowing constraints," Journal of Financial Economics, Elsevier, vol. 96(3), pages 413-432, June.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
- NEP-CFN-2005-11-19 (Corporate Finance)
- NEP-FIN-2005-11-19 (Finance)
- NEP-FMK-2005-11-19 (Financial Markets)
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