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The trade credit channel revisited: evidence from micro data of Japanese small firms

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Abstract

It is suggested that trade credit can be a substitute for bank loans for small- and medium-sized enterprises (SMEs) that have little access to external funding sources. Using unique cross-sectional survey data of Japanese SMEs, we conduct a deep investigation into the substitutability between bank loans and trade credit. This survey contains rich information on the suppliers of trade credit to SMEs, thus enabling the examination of the channel through which credit is provided from suppliers to customers. We find that SMEs with little access to bank credit depend more on large suppliers for trade credit. We also find that when a purchase is made from a large supplier, more credit is indeed provided in the form of trade credit. Furthermore, this channel of credit from large suppliers to SMEs is only observed for solvent customers, not for insolvent customers. Our findings suggest that trade credit plays an important role for entrepreneurial firms over the financial growth cycle. For young and small firms with little access to bank loans trade credit is an important funding source.

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Notes

  1. Gertler and Gilchrist (1993), on the other hand, find that trade credit does not increase during a period of tight money.

  2. In contrast, Giannetti et al. (2011) challenged the notion that the firms with little access to bank credit use trade credit. Based on the 1998 NSSBF, they found that the firms receiving trade credit secure financing from relatively uninformed banks. It implies that the extension of trade credit reveals favorable information to other lenders.

  3. Lending attitude of financial institutions, released by the Bank of Japan, is a diffusion index that is the proportion of the firm’s feeling the current lending attitude of financial institutions is accommodating minus that of the firm’s feeling the current lending attitude of financial institutions is severe.

  4. Japan’s Small Business Research Institute (2005) also states that trade credit is a substitute for bank loans for small firms with less liquidity. Its analysis is based on descriptive statistics of firm-level data.

  5. In the survey, an SME is defined as an enterprise with equity capital less than 300 million yen or total employees less than 300 persons for construction, transportation, manufacturing and some of the real estate and service industries. For the other industries, the SME is defined as an enterprise with an even smaller amount of equity capital and/or a fewer number of employees.

  6. The definition of the SME in footnote 5 is applicable throughout the article.

  7. In 41,807 sample firms, 12,603 firms are incorporated firms and the rest are proprietorships. The full information on B/S and P/L statements is available only for the former firm group; only limited information is available for the latter group. In addition, because our main concern is bank-firm relationships, firms with no responses to the questions on bank-firm relations, which amount to 6,256 out of 12,603 firms, are excluded from the sample. The information on the buyer of intermediate inputs is also indispensable in this study, which is available for 3,265 firms. After excluding firms with inconsistent items in B/S and P/L statements, together with the data screening stated above, the number of firms in the final sample is reduced to 1,659. Detailed comparative information of the data characteristics between our study and the original survey is available from the following website:

    http://www2.kobe-u.ac.jp/~tokutsu/PDF/SBE_Data_Appendix.pdf.

  8. The average ratio of borrowing from financial institutions to total debt for U.S. small firms is 0.5293 in Berger and Udell (1998), which is quite close to ours.

  9. In fact, 3.7% of firms recorded a zero balance on accounts payable.

  10. Petersen and Rajan (1997) reported that the mean ratio of accounts receivable and accounts payable to sales is 0.073 and 0.044, respectively, for the National Survey samples, while the corresponding ratios are 0.185 and 0.116 for the Compustat firms.

  11. The denominator of the ratio of purchases from large and small suppliers is purchases from domestic suppliers, excluding purchases from foreign suppliers. Hence, the ratios of purchases from large and small suppliers sum up to unity.

  12. The median proportion of purchases from large suppliers is only 5%, and its frequency distribution is heavily skewed to the right.

  13. The subscript i represents the i-th firm.

  14. For a detailed industry classification, see Table 1. In the estimation, the second industry, food products, is taken as the base industry. Accordingly, we incorporate 29 constant dummy variables corresponding to the industry numbers (1) to (30) in the table, DUMIND1 to DUMIND30 except for DUMIND2.

  15. See Smith and Blundell (1986) for more details on instrumental variable Tobit.

  16. Although accounts payable are zero for some firms, the proportion of such firms is only 3.7% of the sampled firms; therefore, we do not use Tobit-type estimation.

  17. In the first step, we fail to reject exogeneity of sales, which might justify the use of the sales variable as a valid instrument. However, when we allow for different responses of trade credit to bank dependence for solvent and insolvent firms, it turns out that the Sargan test rejects over-identification restrictions when the sales variable is included as an instrument. Therefore, we do not use sales as an instrument.

  18. The instruments we use are debt-asset ratio, six main bank dummies and their cross terms with insolvent dummy.

  19. In fact, the marginal effects of LARGEVENDOR on ACPAYABLE for insolvent firms are −0.0554 and −0.0461 for BANKLOAN and SHORTLOAN cases, respectively.

  20. As for the importance of trade credit for insolvent firms, Petersen and Rajan (1997) argue that suppliers are more willing than banks to renegotiate their claims or grant additional debt when their customers get into financial distress as suppliers’ rents from selling goods to their customers are lost if the customers are liquidated upon default. Wilner (2000) also argues that suppliers are more dependent on their customers than credit market lenders. Similarly, Franks and Nyborg (1996) show that sunk investments in the customer–supplier relationship make suppliers more lenient toward financially distressed customers. Using Belgian data on first-time business start-ups, Huyghebaert et al. (2007) found that firms in industries with high historical start-up failure rates and entrepreneurs who highly value private benefits of control prefer trade credit to bank loans.

  21. In this case, insolvency might be propagated to other SME suppliers that extend credit to insolvent firms, as their balance sheets also deteriorate.

  22. Berger and Udell (1998), Reid (2003) and Huyghebaert and Van de Gucht (2007) reported that suppliers and commercial banks are the largest provider of credit for start-up firms. Petersen and Rajan (1994, 1995) found that as U.S. small firms age and their relationships with financial institutions mature, they become less dependent on trade credit. Fisman and Love (2003) and Burkart and Ellingsen (2004) show that trade credit constitutes an important source of funding for firms constrained in financial markets.

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Acknowledgments

This research was financially supported by the Japan Economic Research Foundation in 2006 and Grant-in-Aid for Scientific Research (#19330044) from the Japanese Ministry of Education, Culture, Sports, Science and Technology in 2007. We are grateful to Philipp D. Koellinger, associate editor of this journal, two anonymous referees and the participants of the seminars at the University of Groningen and the RIETI Corporate Finance and Network Research Group for extremely helpful comments and suggestions. Any remaining errors are the sole responsibility of the authors.

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Correspondence to Kazuo Ogawa.

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Ogawa, K., Sterken, E. & Tokutsu, I. The trade credit channel revisited: evidence from micro data of Japanese small firms. Small Bus Econ 40, 101–118 (2013). https://doi.org/10.1007/s11187-011-9344-5

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