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

Author

Listed:
  • Martina Engemann
  • Katharina Eck
  • Monika Schnitzer

Abstract

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. Thus, for exporters who are not able to obtain bank credits in the first place, trade credits and bank credits are complements. Using panel data on German manufacturing firms, we provide supportive evidence for our theoretical predictions. For financially unconstrained firms, trade credits and bank credits are substitutes. For financially constrained exporters, instead, trade credits have a significantly positive effect on the availability of bank credits.

Suggested Citation

  • Martina Engemann & Katharina Eck & Monika Schnitzer, 2011. "Trade Credits and Bank Credits in International Trade: Substitutes or Complements?," Working Papers 108, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:108_engemanneckschnitzer
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Katharina Eck & Martina Engemann & Monika Schnitzer, 2015. "How trade credits foster exporting," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(1), pages 73-101, February.
    2. Schmidt-Eisenlohr, Tim, 2013. "Towards a theory of trade finance," Journal of International Economics, Elsevier, pages 96-112.
    3. Patricio Aroca & Randall Jackson, 2018. "Value Chains: Production Upstreamness and Downstreamness Revisited," Working Papers Working Paper 2018-01, Regional Research Institute, West Virginia University.
    4. repec:bdr:ensayo:v:35:y:2017:i:83:p:130-138 is not listed on IDEAS
    5. Pengxiang Zhai & Rufei Ma, 2017. "Does ownership structure affect trade credit policy in small- and medium-sized firms? Evidence from China," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 35(83), pages 130-138, June.
    6. Auboin, Marc & Engemann, Martina, 2013. "Trade finance in periods of crisis: What have we learned in recent years?," WTO Staff Working Papers ERSD-2013-01, World Trade Organization (WTO), Economic Research and Statistics Division.

    More about this item

    Keywords

    Trade Credits; Bank Credits; International Trade; Financial Constraints;

    JEL classification:

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

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