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Firms as financial intermediaries - evidence from trade credit data

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  • Demirguc-Kunt, Asli
  • Maksimovic, Vojislav

Abstract

The authors argue that non-financial firms act as intermediaries, by channeling short-term funds from the financial institutions in an economy, to their best use. Non-financial firms act in this way because they may have a comparative advantage in exploiting informal means of ensuring that borrowers repay. These considerations suggest that to optimally exploit their advantage in providing trade credit to some classes of borrowers, firms should obtain external financing from financial intermediaries, and markets, when this is efficient. Thus the existence of a large banking system is consistent with these considerations. Using firm-level data for thirty nine countries, the authors compute turnovers in payables, and receivables, and examine how they differ across financial systems. They find that the development level of a country's legal infrastructure, and banking system predicts the use of trade credit. Firms'use of bank debt is higher relative to their use of trade credit in countries with efficient legal systems. Bur firms in countries with large, privately owned banking systems, offer more financing to their customers, and take more financing from them. The authors'findings suggest that trade credit is a complement to lending by financial intermediaries, and should not be viewed by policymakers as a substitute.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2696.

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Date of creation: 31 Oct 2001
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Handle: RePEc:wbk:wbrwps:2696

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Keywords: Economic Theory&Research; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring;

References

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  1. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
  3. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-91.
  4. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  5. Barth, James R. & Caprio, Gerard & Levine, Ross, 2000. "Banking systems around the globe : do regulation and ownership affect the performance and stability?," Policy Research Working Paper Series 2325, The World Bank.
  6. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, 1999. "What Determines Firm Size?," NBER Working Papers 7208, National Bureau of Economic Research, Inc.
  7. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  8. Franklin Allen, . "Stock Markets and Resource Allocation (Reprint 036)," Rodney L. White Center for Financial Research Working Papers 15-92, Wharton School Rodney L. White Center for Financial Research.
  9. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-56, October.
  10. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1995. "Stock market development and firm financing choices," Policy Research Working Paper Series 1461, The World Bank.
  11. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1998. "The Quality of Goverment," NBER Working Papers 6727, National Bureau of Economic Research, Inc.
  12. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
  13. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
  14. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Market Development and Financial Intermediaries: Stylized Facts," World Bank Economic Review, World Bank Group, vol. 10(2), pages 291-321, May.
  15. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  16. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1999. "Institutions, financial markets, and firm debt maturity," Journal of Financial Economics, Elsevier, vol. 54(3), pages 295-336, December.
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