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Trade Credit and Credit Rationing in Canadian Firms

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  • Cunningham, Rose
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    Abstract

    Burkart and Ellingsen (2004) develop a model of trade credit and bank credit rationing which predicts that trade credit will be used by medium-wealth and low-wealth firms to help ease bank credit rationing. This paper tests this and other predictions of the Burkart and Ellingsen model using a large sample of more than 28,000 Canadian firms. The author 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 the 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 bank credit, suggesting 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 low-wealth, declining and distressed firms supply proportionally more trade credit than firms with healthier balance sheets.

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    File URL: http://www5.statcan.gc.ca/bsolc/olc-cel/olc-cel?catno=11F0027M2005036&lang=eng
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    Bibliographic Info

    Paper provided by Statistics Canada, Analytical Studies Branch in its series Economic Analysis (EA) Research Paper Series with number 2005036e.

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    Date of creation: 04 Nov 2005
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    Handle: RePEc:stc:stcp5e:2005036e

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    Related research

    Keywords: Business performance and ownership; Financial statements and performance;

    This paper has been announced in the following NEP Reports:

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    1. 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.
    2. 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.
    3. 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.
    4. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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.
    7. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank.
    8. 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.
    9. 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.
    10. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 209-225, June.
    11. Ross, Donald G. & Pike, Richard H., 1997. "Export credit risks and the trade credit offer: some Canadian evidence," Journal of Multinational Financial Management, Elsevier, vol. 7(1), pages 55-70, April.
    12. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
    13. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
    14. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
    15. 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.
    16. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
    17. Bitros, George C, 1979. "Neoclassical Theory of Trade Credit: A Critique and A Reformulation," Econometrica, Econometric Society, vol. 47(1), pages 199-202, January.
    18. 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.
    19. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
    20. 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.
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    Cited by:
    1. Ono, Masanori, 2009. "Trading companies as financial intermediaries in Japan," MPRA Paper 17331, University Library of Munich, Germany.

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