Trade Credit and Credit Rationing in Canadian Firms

Traders are often blamed for high prices, prompting government regulation. We study the effects of a government ban of a layer of financing intermediaries in edible oil supply chain in Bangladesh during 2011–2012. Contrary to the predictions of a standard model of an oligopolistic supply chain, the ban caused downstream wholesale and retail prices to rise, and pass-through of the changes in imported crude oil price to fall. These results can be explained by an extension of the standard model to incorporate trade credit frictions, where intermediaries expand credit access of downstream traders. (JEL L13, L14, L66, O13, Q11, Q13, Q17)

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The Insurance Value of Trade Credit

International Journal of Economics and Finance ◽

10.5539/ijef.v11n7p87 ◽

2019 ◽

Vol 11 (7) ◽

pp. 87

Author(s):

Mario Eboli ◽

Andrea Toto

Keyword(s):

Financial Markets ◽

Financial Constraints ◽

Trade Credit ◽

Credit Rationing ◽

Financial Policy ◽

Positive Probability ◽

Optimal Amount ◽

Liquidity Constraint ◽

Manufacturing Sectors ◽

Liquidity Shock

The extensive use of trade credit in all manufacturing sectors, despite its high cost, is an apparent puzzle that economists explain in terms of asymmetric information problems affecting financial markets. The financial constraints arising from credit rationing and limited access to stock markets suffice to induce firms to resort to trade credit as a supplemental source of funding. Nonetheless, empirical evidence shows that also large and liquid firms facing no binding financial constraints use substantial amounts of trade credit. We address this issue by modelling the financial policy of a firm that does not face a binding liquidity constraint but the risk of being constrained in the future. We characterise the optimal amount of trade credit held by such a firm, and we show that a positive probability of facing a liquidity constraint leads the firm to fund its inventories with trade credit, even if cheaper sources of funds are available. The rationale is that trade credit provides implicit coverage against liquidity risk. Therefore, the optimal amount of trade credit grows with the expected size of a possible liquidity shock and with the likelihood of its occurrence.

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Trade Credit and Credit Rationing

Review of Financial Studies ◽

10.1093/rfs/10.4.903 ◽

1997 ◽

Vol 10 (4) ◽

pp. 903-937 ◽

Cited By ~ 408

Author(s):

Bruno Biais ◽

Christian Gollier

Keyword(s):

Trade Credit ◽

Credit Rationing

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Policy Responses to the Collapse of the Financial Sector: Introduction

National Institute Economic Review ◽

10.1177/0027950110364091 ◽

2010 ◽

Vol 211 ◽

pp. R1-R2 ◽

Cited By ~ 1

Author(s):

Ray Barrell

Keyword(s):

Financial Crisis ◽

Interest Rates ◽

Euro Area ◽

Trade Credit ◽

Investment Decision ◽

Credit Rationing ◽

Policy Responses ◽

Investment Decision Making ◽

The Us ◽

The Uk

The downturn in global economic activity that started in 2008 was turned into a major recession after the failure of Lehman Brothers in September 2008. It appears that world output fell by more than 1 per cent in 2009, and OECD output probably fell by around 3½ per cent. The effects on output were more marked in the Euro Area and the UK than they were in the US or Canada, which partly reflects the policy responses chosen by Treasuries and Central Banks. The financial crisis that drove the recession affected banks in the US, the UK, the Euro Area and the rest of Europe rather more than it did those in Canada, Australia and Japan. However, recessions have been common, with only Australia and Poland appearing to avoid them. The financial crisis led rapidly to a freezing of trade credit, which caused world trade to decline very sharply at the beginning of 2009. The financial crisis also led to an increase in risk premia in investment decision-making and hence to a decline in the equilibrium capital output ratio, which caused a sharp reduction in the demand for capital goods. Combined with credit rationing effects for firms needing access to borrowing, this induced a collapse in investment. Trade channels made the crisis global, as did movements in exchange rates. Interest rates were cut sharply in the US, Europe and Japan, and approached levels seen in Japan for the previous decade. As a result the yen appreciated strongly, and the combination of the effects of this appreciation on competitiveness and the decline in investment goods trade meant that Japan suffered worse than most other countries, at least in the short term.

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Firm Funding and Investment under Bank Credit Control Policy: Evidence from China

10.47260/jafb/1145 ◽

2021 ◽

pp. 101-134

Author(s):

Xiaochen Fu

Keyword(s):

Trade Credit ◽

Control Policy ◽

Credit Rationing ◽

Bank Lending ◽

Jel Classification ◽

Bank Loans ◽

Level Data ◽

Amplifying Effect ◽

Financing Gap ◽

Regulatory Commission

Using the 2014 China Banking Regulatory Commission (CBRC) credit control policy as a quasi-natural experiment, this paper demonstrates that credit supply contraction leads to a significant reduction in firm’s external funding, cash holding, and investment. Analysis of both loan-level and corporate-level data reveal that new bank loans issuance of targeted firms dropped significantly after the regulation. State-owned banks are identified as the main policy implementer. By instrumenting the change of loans issuance with the policy shock, I further discover the amplifying effect of large declines in bond issuance and trade credit for the targeted firms. Cash holdings were used to cushion the financing gap. Investment dropped and inefficient investment increased due to the shock. Interestingly, whereas such impacts were significant for non-state owned enterprises, state-owned enterprises (SOEs) were barely affected. Overall, I conclude that the lending control policy led to less capital resources allocated to non-SOEs but not SOEs. JEL classification numbers: G21, G28, G32, G38. Keywords: Bank lending, Firm funding, Firm investment, SOBs, SOEs, Credit policy, Credit rationing.

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