Trade Credit, Bank Loans, and Monitoring: Evidence from Japan
AbstractFirms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect. This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-381.
Length: 49 pages
Date of creation: Oct 2005
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Other versions of this item:
- Yoshiro Miwa & J. Mark Ramseyer, 2005. "Trade Credit, Bank Loans, and Monitoring: Evidence from Japan," CARF F-Series CARF-F-054, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- NEP-ALL-2005-10-15 (All new papers)
- NEP-CFN-2005-10-15 (Corporate Finance)
- NEP-FMK-2005-10-15 (Financial Markets)
- NEP-INT-2005-10-15 (International Trade)
- NEP-SEA-2005-10-15 (South East Asia)
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