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In-kind finance

  • Mike Burkart
  • Tore Ellingsen

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Suppliers, therefore, may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes depending on, amongst other things, the borrower's wealth. The model also explains why firms both take and give costly trade credit even when the borrowing rate exceeds the lending rate. Finally, the model suggests reasons for why trade credit is more prevalent in less developed credit markets and for why accounts payable of large unrated firms are more countercyclical than those of small firms.

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File URL: http://eprints.lse.ac.uk/24940/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24940.

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Length: 32 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:ehl:lserod:24940
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

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  19. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
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