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Substitution of trade credit for bank credit: empirical study of financing behaviour of Indian

  • Bhat Ramesh

The hypothesis that companies substitute trade credit for bank credit during period of restricted monetary policy has been subject of empirical investigation for the reasons that it helps us to understand the linkages between the financial sector and real sector of economy. This paper examines whether companies in India substitute trade credit for bank credit during restricted monetary policy years. Using panel data econometric method the study uses time-series cross-section company level data of 828 manufacturing companies covering period from 1990 to 2001. The findings suggest that the magnitude of substitution of trade credit for bank credit is statistically significant during the monetary restrictive years. These results assume significance as about 40 per cent and 30 per cent of current assts constitute the trade credit and bank credit respectively. Both these put together is about 35 per cent of total asset of sample companies in India. The results also suggest that magnitude of substitution vary depending on the size of company.

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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number WP2004-05-08.

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Handle: RePEc:iim:iimawp:wp01820
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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  3. Jeffrey H. Nilsen, 1999. "Trade Credit and the Bank Lending Channel," Working Papers 99.04, Swiss National Bank, Study Center Gerzensee.
  4. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May.
  5. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  6. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-91.
  7. Kashyap, Anil K & Lamont, Owen A & Stein, Jeremy C, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 565-92, August.
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