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Trade Credit in Small and Medium Size Firms: An Application of the System Estimator With Panel Data

  • Olga Rodríguez-Rodríguez

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    Financing through suppliers is a subject that has been little studied in the economic literature in general and in corporate finance in particular. Although several hypotheses have been put forward to explain the different reasons behind this phenomenon, trade credit is not based on a general theory. This study provides empirical evidence about factors determining the use of trade credit for a sample of small and medium size firms, which are potentially the firms that would follow this financing route, since they are more rationed in credit markets. Using a panel of Canary-Island firms from 1990 to 1996, and by means of specifications with the system estimator, results reveal that trade credit leads to a reduction in asymmetric information between firms and their financial backers, as well as in transaction costs. Furthermore, we confirm the theory that companies with easier access to institutional finance act as a credit channel for those with greater difficulties to obtain external funds. Copyright Springer 2006

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    File URL: http://hdl.handle.net/10.1007/s11187-006-0017-8
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    Article provided by Springer in its journal Small Business Economics.

    Volume (Year): 27 (2006)
    Issue (Month): 2 (October)
    Pages: 103-126

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    Handle: RePEc:kap:sbusec:v:27:y:2006:i:2:p:103-126
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100338

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    1. Fisman, Raymond & Love, Inessa, 2001. "Trade credit, financial intermediary development, and industry growth," Policy Research Working Paper Series 2695, The World Bank.
    2. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296 Elsevier.
    3. Gregory E. Elliehausen & John D. Wolken, 1993. "The demand for trade credit: an investigation of motives for trade credit use by small businesses," Staff Studies 165, Board of Governors of the Federal Reserve System (U.S.).
    4. Giuseppe Marotta, 2001. "Is trade credit more expensive than bank loans? Evidence from Italian firm-level data," Heterogeneity and monetary policy 0103, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.
    5. 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.
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