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Trade Credit and Credit Rationing in Canadian Firms

  • Cunningham, Rose
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    Burkart and Ellingsen (2004) develop a model of trade credit and bank credit rationing which predicts that trade credit will be used by medium-wealth and low-wealth firms to help ease bank credit rationing. This paper tests this and other predictions of the Burkart and Ellingsen model using a large sample of more than 28,000 Canadian firms. The author uses an endogenous method to divide the firms into the appropriate wealth categories rather than arbitrarily selecting firms likely to be credit-rationed. The data support the main predictions of the model quite well. The author finds that medium-wealth firms substitute trade credit for bank credit consistent with using it to alleviate bank credit rationing. The low-wealth firms use trade credit but it is positively linked to bank credit, suggesting those firms are constrained in both bank credit and trade credit markets, and so cannot use trade credit to adjust as much to negative shocks. The findings also suggest that there are very few unconstrained, high-wealth Canadian firms. The author also finds low-wealth, declining and distressed firms supply proportionally more trade credit than firms with healthier balance sheets.

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    Paper provided by Statistics Canada, Analytical Studies Branch in its series Economic Analysis (EA) Research Paper Series with number 2005036e.

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    Date of creation: 04 Nov 2005
    Date of revision:
    Handle: RePEc:stc:stcp5e:2005036e
    Contact details of provider: Postal: Tunney's Pasture, Ottawa, Ontario, K1A 0T6
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    1. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
    2. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    3. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
    4. Jain, Neelam, 2001. "Monitoring costs and trade credit," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 89-110.
    5. 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.
    6. Mitchell A. Petersen & Raghuram G. Rajan, 1996. "Trade Credit: Theories and Evidence," NBER Working Papers 5602, National Bureau of Economic Research, Inc.
    7. J. Stephen Ferris, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 243-270.
    8. Ross, Donald G. & Pike, Richard H., 1997. "Export credit risks and the trade credit offer: some Canadian evidence," Journal of Multinational Financial Management, Elsevier, vol. 7(1), pages 55-70, April.
    9. Emery, Gary W., 1984. "A Pure Financial Explanation for Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 271-285, September.
    10. Jeffrey H. Nilsen, 1999. "Trade Credit and the Bank Lending Channel," Working Papers 99.04, Swiss National Bank, Study Center Gerzensee.
    11. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
    12. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    13. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
    14. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank.
    15. Nadiri, M Ishaq, 1969. "The Determinants of Trade Credit in the U.S. Total Manufacturing Sector," Econometrica, Econometric Society, vol. 37(3), pages 408-23, July.
    16. 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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    18. repec:tpr:qjecon:v:110:y:1995:i:2:p:407-43 is not listed on IDEAS
    19. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    20. Bitros, George C, 1979. "Neoclassical Theory of Trade Credit: A Critique and A Reformulation," Econometrica, Econometric Society, vol. 47(1), pages 199-202, January.
    21. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 209-225, June.
    22. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
    23. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
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