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Trade Credit: Theories and Evidence

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  • MITCHELL A. PETERSEN
  • RAGHURAM G. RAJAN

Abstract

Firms may be financed by their suppliers rather than by financial institutions. There are many theories of trade credit, but few comprehensive empirical tests. This article attempts to fill the gap. We focus on small firms whose access to capital markets may be limited and find evidence suggesting that firms use more trade credit when credit from financial institutions is unavailable. Suppliers lend to constrained firms because they have a comparative advantage in getting information about buyers, they can liquidate assets more efficiently, and they have an implicit equity stake in the firms. Finally, firms with better access to credit offer more trade credit. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 322.

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Handle: RePEc:wop:chispw:322

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  1. 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.
  2. 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.
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  8. Rogers, F. Halsey, 1994. "“Man to Loan $1500 and Serve as Clerk”: Trading Jobs for Loans in Mid-Nineteenth-Century San Francisco," The Journal of Economic History, Cambridge University Press, vol. 54(01), pages 34-63, March.
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  16. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  17. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 709-37, August.
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