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Trade Credits and Bank Credits in International Trade: Substitutes or Complements?

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  • Martina Engemann
  • Katharina Eck
  • Monika Schnitzer

Abstract

type="main" xml:id="twec12167-abs-0001"> Trade credits are an important financing tool for internationally active firms. This is surprising, as trade credits are generally more expensive than bank credits and thus a costly substitute for bank financing. In this paper, we investigate the relation between trade credits and bank credits for exporting firms. We develop a theoretical model and show that trade credits convey a quality signal which reduces the risk of the transaction and may thus facilitate obtaining additional bank credits. Hence, exporters who are not able to obtain bank credits in the first place use trade credits and bank credits complementarily. Using panel data on large German manufacturing firms, we provide supportive evidence for our theoretical predictions. In general, trade credits and bank credits are substitutes. For financially constrained exporters, the overall substitution effect is attenuated which is consistent with a positive signalling effect.

Suggested Citation

  • Martina Engemann & Katharina Eck & Monika Schnitzer, 2014. "Trade Credits and Bank Credits in International Trade: Substitutes or Complements?," The World Economy, Wiley Blackwell, vol. 37(11), pages 1507-1540, November.
    • Handle: RePEc:bla:worlde:v:37:y:2014:i:11:p:1507-1540
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    File URL: http://hdl.handle.net/10.1111/twec.2014.37.issue-11
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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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