simultaneity and the demand for money in canada comments and extensions a recent paper by poloz 1980 examined the interesting issue of simultaneity with respect to the demand for money in canada the purpose of his paper was twofold 1 to demonstrate theoretically that the magnitude and direction of simultaneous equations se bias in the demand for money equation is variable depending upon the current economic environment and 2 to provide empirical support for this hypothesis using recursive ordinary least squares ols and instrumental variable iv estimation while arguing correctly that different economic environments may call forth different monetary policy instruments poloz presumed that his model and its error structure would remain constant under the different policy regimes consequently he did not consider how the endogenous and exogenous variables and hence the model itself might be affected in this paper we examine the issue of simultaneity by referring to appropriate policy variables which might be considered in different exchange rate regimes together with an analysis of the different systems of equations which might subsequently arise we argue that the direction and magnitude of bias where it does occur are empirical

does trade credit play a signalling role some evidence from smes microdata using micro data on small and medium sized enterprises this paper empirically investigates the signalling hypothesis formulated on the role of trade credit biais and gollier in rev financ stud 10 903 937 1997 burkart and ellingsen in am econ rev 94 569 590 2004 the research method adopted allows evaluation of the impact of suppliers credit on bank debt accounting for the strength duration of bank firm relationships our main finding is that trade credit seems to have an information content for banks especially when the latter do not dispose of adequate soft information on firms which is likely the case at the beginning stages of bank firm relationships an implication of our results is that the availability of suppliers credit might be crucial to foster access to institutional funding for new firms entering the market our evidence also suggests that banks seem to consider suppliers a reliable source of information on firms financial conditions even after several years of lending relationships

a pure financial explanation for trade credit this paper provided a pure financial explanation for the existence of trade credit and for the values of the credit terms offered to customers two motives for extending trade credit were identified the pure operating flexibility motive arises because the opportunity to change credit policy provides the seller an efficient way to respond to fluctuations in demand this motive was eliminated from consideration in this paper by assuming constant demand the seller must hold a liquid reserve when the financial markets are imperfect and the desire to earn an excess rate of return on this reserve explains the pure financial intermediary motive for trade credit the pure financial incentive to lend this liquid reserve to customers was examined by viewing a market borrowing rate of interest that exceeds the market lending rate of interest as a hindrance to trade or equivalently as a financial market tariff this tariff imposes a wedge between the market prices paid and received for the product plus a loan and thereby inflicts a loss of surplus on the seller and buyers trade credit lending enables the seller and or the buyers to recapture at least part of this loss when the source of the tariff does not apply to direct loans to customers financial market tariffs caused by transactions costs fulfill this requirement because the trade credit lender s familiarity with its customers and product provide it with information and collection cost advantages over financial intermediaries tariffs caused by financial intermediary rents fulfill this requirement as well because the parties to a trade credit loan do not employ the services of a financial intermediary increasing opportunity costs and financial market imperfections in addition to the ones described above establish the limits of credit policy the optimal amount of accounts receivable is derived from the condition that the marginal revenue of trade credit lending is equal to the marginal cost this condition combined with factoring costs produces a unique finite optimal credit period accrual accounting for income tax purposes imposes an additional restriction because the firm is taxed on the recovery of its opportunity costs these limitations on credit policy were examined separately in this paper for clarity but they are in effect simultaneously in practice

trade credit bank lending and monetary policy transmission this paper investigates the role of trade credit in the transmission of monetary policy most models of the transmission mechanism allow the firm to access only financial markets or bank lending according to some net worth criterion in our model we introduce trade credit as an additional source of funding we predict that when monetary policy tightens there will be a reduction in market and bank lending and an increase in trade credit this is confirmed with an empirical investigation of 16 000 manufacturing firms

accounts receivable management policy theory and evidence this paper develops and tests hypotheses that explain the choice of accounts receivable management policies the tests focus on both cross sectional explanations of policy choice determinants as well as incentives to establish captives we find size concentration and credit standing of the firm s traded debt and commercial paper are each important in explaining the use of factoring accounts receivable secured debt captive finance subsidiaries and general corporate credit we also offer evidence that captive formation allows more flexible financial contracting however we find no evidence that captive formation expropriates bondholder wealth firms typically sell merchandise on credit rather than requiring immediate cash payment such credit sales generate accounts receivable although credit terms and credit collection procedures have been studied see smith 1980 there has been little systematic analysis of the organizational and financial structures employed to manage the firm s accounts receivable these decisions merit more careful attention for two reasons first receivables are a substantial fraction of corporate assets for example 1986 compustat data indicate that accounts receivable are 21 0 of u s manufacturing corporations total assets second we observe substantial diversity in firms use of specialized contracts and intermediaries in their accounts receivable management policies firms can 1 establish a captive finance subsidiary 2 issue accounts receivable secured debt 3 factor 4 employ a credit reporting firm 5 retain a credit collection agency or 6 purchase a credit insurance policy 1 in this paper we demonstrate that accounts receivable management policy offers opportunities for both the development of a robust theory as well as empirical testing of the theory s implications although the data necessary to

trading volume and asset liquidity since the depth and liquidity of a market depend on the entry decisions of all potential participants each trader assesses them according to conjectures about entry by others if trade is equally costly across markets this externality leads to the concentration of trade on one market if not it can produce multiple conjectural equilibria some where trade concentrates on one market and others where large traders resort to a separate market or to search for a trading partner while fragmentation is welfare reducing in the two market case no such ranking is possible if it involves off exchange search

trade credit and cross country predictable firm returns we investigate the role of trade credit links in generating cross border return predictability between international firms using data from 42 countries from 1993 to 2009 we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable by the returns of their associated customer countries this behavior is especially prevalent for firms with high levels of foreign sales and is robust to a variety of controls to better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links the model has further predictions about this phenomenon including stronger predictability during periods of high credit constraints and high uninformed trading volume we find supportive empirical evidence for these results

the exploitation of relationships in financial distress the case of trade credit this paper develops optimal pricing lending and renegotiation strategies for companies in relationships where one firm is highly dependent on the other long term trade creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors anticipating these larger renegotiation concessions not only do less financially stable firms prefer trade credit but all firms agree to pay a higher interest rate for trade credit the model also explains the existence of teaser interest rates and convenience classes findings are consistent with those of the relationship lending literature

a review of trade credit literature opportunities for research in operations abstract trade credit arises when a buyer delays payment for purchased goods or services its nature has predominantly been an area of inquiry for researchers from the disciplines of finance marketing and economics but it has received relatively little attention in other domains in our article we provide an integrative review of the existing literature and discuss conflicting study outcomes we organize the relevant literature into seven areas of inquiry and analyze four in detail trade credit motives order quantity decisions credit term decisions and settlement period decisions additionally we derive a detailed agenda for future research in these areas

international financial intermediation and aggregate fluctuations under alternative exchange rate regimes this paper presents a two country overlapping generations model in which financial intermediation arises endogenously as an incentive compatible means of economizing on monitoring costs because of the existence of transactions costs money markets in the two countries are segmented and investors have differential access to international credit markets the model is used to generate predictions about the role of international intermediation in determining the nature of business cycle phenomena across alternative exchange rate regimes disturbances are propagated by a credit allocation mechanism which also lends a novel flavor to the model s long run properties

cyclical demand and the choice of debt maturity this study provides a model in which a supplier s use of short and long term debt depends on the demand for its product the model predicts that suppliers use short term debt to match their assets and liabilities maturities and that their incentive to do so is stronger the larger the term premium the model also predicts that the use of short term debt increases the amplitudes of the supplier s investment production and sales cycles these changes occur because the use of short term debt permits suppliers to match production and sales more closely to the pattern of demand for the final good

endogenous market participation and the general equilibrium value of money we study the monetary theory implications of fixed costs associated with trade in private assets we show that with heterogeneous endowment profiles it is possible for an endogenous subset of agents to hold currency even when it is dominated in return by a competing asset with respect to positive issues in monetary theory the model implies that changes in the steady state growth rate of the money supply have a negative effect on real interest rates because of endogenous market participation measures on the normative side we show that there may be an equity efficiency trade off from monetary deflation

bank information monopoly and trade credit do only banks have information about small businesses according to previous studies a bank can set a higher interest rate for small firms by establishing a lending relationship since information asymmetry limits competition between banks therefore the bank can acquire monopoly rent from small firms however if small firms can use trade credit which is another financial source the bank cannot extract monopoly rent in this article we examine whether small firms can use trade credit if the bank sets a higher interest rate using panel data of small firms in japan our analysis shows that when the interest rate the bank sets is too severe or worsened for the borrower the ratio of trade payables increases and the bank loses its amount of loans this result implies that trade creditors alleviate the problems of bank information monopolies in japan

an econometric model of canadian monetary policy over the 1970s the last decade has witnessed the emergence of the bank of canada as a key participant in the arena of policy formation indeed the high profile of the governor and the bank has given rise to a considerable amount of discussion and debate over canadian monetary policy in both the popular media and academic journals i to a large extent this analysis has been essentially descriptive being based upon casual observations rather than a tightly formulated econometric model from the viewpoint of understanding the canadian economy over the 1970s there is a growing need to establish empirically the mechanisms of monetary policy in canada and to determine its impact upon such macroeconomic variables as real output the purpose of this paper is to specify and to estimate a simple model of canadian monetary policy over the seventies the model s focus is upon several prominent institutional details that are special to the operation of canadian monetary policy accordingly the model reflects the practice of the bank of canada in setting nominal interest rates and allowing the nominal money supply to be demand determined this modeling necessarily leads to an examination of the role and effects of the money targets adopted by the bank of canada since 1975

trade credit and bank relationships evidence from pre world war i belgium we investigate the determinants of trade credit granted by suppliers in a historical environment which was characterized by high information asymmetries and strong banks focusing on the role of bank firm relationships our results which are based on a unique sample of 535 firm year observations for 125 listed belgian firms in four dominant industries in the period 1905 to 1909 are generally consistent with the financing role of trade credit they suggest that trade credit was a tool for channelling funds from firms with close bank ties to other firms which is consistent with findings for contemporary developing countries

trade credit and the effect of macro financial shocks evidence from u s panel data using disaggregated panel data we examine how firms change trade credit in response to a monetary tightening we find that both accounts payable and accounts receivable increase with tighter monetary policy implying that trade credit helps firms absorb the effect of a credit contraction further both s p 500 firms and a comparison group of smaller firms increase net trade credit accounts receivable minus payable making up for the reduced liquidity associated with tighter policy however we find no evidence that large firms play this role more actively than smaller firms

endogenous market thinness and stock price volatility thin equity markets cannot accommodate temporary bulges of buy or sell orders without large price movements the resulting volatility can induce risk averse transactors who face transaction costs to desert these markets thus thinness and the related price volatility may become joint self perpetuating features of an equity market irrespective of the volatility of asset fundamentals if however appropriate incentive schemes are adopted to encourage entry by additional investors this vicious circle can be broken eventually shifting the market to a selfsustaining superior equilibrium characterized by a higher number of transactors lower price volatility and larger supply of the asset a number of empirical studies cohen et al 1976 telser and higimbotham 1977 pagano 1986 tauchen and pitts 1983 have found that thin speculative markets are ceteris paribus more volatile than deep ones a plausible explanation for this finding is that thin markets are generally characterized by small numbers of transactors per unit time and thus their prices are more sensitive to the impact of individual traders demand shocks conversely in deep markets transactors are so many that the uncorrelated demand shocks experienced by individual traders tend to offset each other and leave market prices largely unaffected while this suggests a rationale for the observed relationship between market size and price volatility it does so by taking market size as the exogenous factor however the volatility of a speculative market may feed back on its size in the sense that the high liquidation risk implied by very volatile prices can induce potential entrants to keep out of the market this paper shows that in a stock market with transaction costs this interaction between thinness and volatility can produce multiple steady state equilibria some characterized by low trade and high volatility and others by high trade and low volatility whether the market will settle in one equilibrium or another depends entirely on the expectations held by economic agents sections 2 and 3 the existence of these multiple bootstrap equilibria can be explained heuristically as follows each additional trader generates a positive externality for other actual or potential traders by decreasing the riskiness of the stock lower risk in turn tends to attract more investors with the effect of raising stock prices and inducing corporations to issue additional equity we thus have a feedback loop between market size and price volatility where market size is measured both along the dimension of the number of traders and along that of the total stock of equities if however investors face transactions costs in the stock market this positive feedback may fail to be operative if the volume of trade is expected to be small investors with relatively high transaction costs will abstain from trading thus the market

review of literature on working capital management and future research agenda the purpose of this study is to take a stock of what has been studied on working capital management wcm so far and ascertain the factors which are more likely to be impacted by poor wcm moreover it aims to spell out the areas for further research on wcm so that the body of knowledge can be expanded a systematic literature review of the research works on wcm has been performed using google scholar articles with citations of 50 and above as of june 05 2018 are considered for the detailed citation based analysis further classification of such articles has been done on the basis of common themes followed by a thorough content analysis the citation based analysis suggests that there is a growing popularity of studies related to wcm in recent times however majority of the impactful studies are published in relatively lower category journals this further intrigues us to explore the content of such studies based on the content the studies are classified under five different themes it is found that majority of the highly cited articles have examined the relation between the wcm and profitability of the firms moreover repetitive uses of few proxies in such studies have also been identified this finding most probably explains the reason behind so many highly cited articles getting published in relatively lower category journals in view of this this study tries to explore further scope of research on wcm and lists down potential research questions for the future researches firstly it provides an idea about the most cited area of researches related to wcm and the recent growth of studies in this domain academicians can decide upon their future area of research based on the findings related to the proxies and outcome from these studies secondly it shows the most popular avenue of publishing the articles related to wcm which will certainly motivate the researchers to pursue such study it has been found from the analysis that majority of the impactful articles are published in lower category journals therefore this study identifies the reason behind the same and lists down some innovative research questions to provide some future research directions thirdly the finance managers can use this finding to identify the relevant consequences of poor wcm finally it can serve as a reference point for all future ideas related to wcm the paper classifies the present literature on wcm into five major themes and performs a content analysis of the same this is essential as the content analysis highlights different proxies used as inputs which effectively drive efficient wcm moreover the study also identifies the huge scope of future research in the domain of wcm according to our limited knowledge such extensive literature review on wcm is rare

testing interest rate parity and rational expectations for canada and the united states the purpose of this paper is to examine the joint hypothesis of interest rate parity and rational expectations for canada and the united states using monthly data two approaches to testing are considered 1 the substitution method and 2 testing the cross equation non linear rational expectations restrictions from solving the interest rate parity equation it is demonstrated that standard application of the substitution method requires the assumption that the interest rate parity equation holds deterministically tests for unit roots in the spot exchange rate and interest rate differentials are also investigated

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

ethnicity and credit in african manufacturing abstract this paper investigates whether market interaction can by itself perpetuate the lack of ethnic diversity that is observed in the business communities of many developing countries using case study data on manufacturing firms in kenya and zimbabwe we find no evidence that blacks or women are disadvantaged in the attribution of bank credit once we control for firm size and other observable characteristics in contrast an ethnic and gender bias is noticeable in the attribution of supplier credit although we cannot rule out the presence of discrimination the bulk of the evidence indicates that network effects play an important role in explaining this bias

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

liquidity and market participation abstract a model of market participation in competitive asset markets is constructed there are two assets a liquid asset traded without cost and an illiquid asset traded subject to fixed transactions costs agents have random needs for liquidity but they are precluded from trading claims contingent on their type and from diversifying between assets depending on parameter values both assets or only one asset may be traded in equilibrium there exists a participation externality in that agents do not take account of the effect of their participation decisions on asset prices there tends to be an underprovision of liquidity in equilibrium

an evolutionary approach to financial innovation the purpose of this paper is to explain why some markets for financial products take off while others vanish as soon as they have emerged to this end we model an infinite sequence of capm economies in which financial products can be used for insurance purposes agents participation in these financial products however is restricted consecutive stage economies are linked by a mapping transition function which determines the next period s participation structure from the preceding period s participation the transition function generates a dynamic process of market participation which is driven by the percentage of informed traders and the rate at which a new asset is adopted we then analyse the evolutionary stability of stationary equilibria in accordance with the empirical literature on financial innovation it is obtained that the success of a financial innovation a mutation depends on a sufficiently high trading volume marketing and new and differentiated hedging opportunities in particular a set of complete markets forming a stationary equilibrium is robust with respect to any further financial innovation while this is not necessarily true for a set of incomplete markets

liquidity banking and bank failures a multiperiod model with risk neutral agents is constructed in which a liquidity problem arises in an equilibrium with decentralized tradin g in capital which banking institutions are able to alleviate depos it contracts provide for early withdrawal banks hold debt and agent s who borrow from banks hold compensating balances institutional col lapse or a state of the world when bank failures are experienced is associated with a high demand for liquidity low output and a lower than average level of welfare bank failure is symptomatic of a part icular state of endowments preferences and technology and governme nt intervention is undesirable copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the behavior of money stock under interest rate control some evidence for canada a widely held view of interest rate control is that under this policy the demand for m1 determines the behavior of the stock of m1 an alternative view is that under interest rate control the supply function of m1 is the residual quantity determined by the banking system given the levels of bank credit and nontransaction deposits chosen by the nonbank public the authors find evidence in favor of the alternative view for the canadian case 1970 84 copyright 1987 by ohio state university press

what can regulators regulate the case of bank entry previous researchers have claimed that the banking acts of 1933 and 1935 reduced the annual rate of entry of new commercial banks by as much as 50 percent between 1936 and 1962 in contrast the authors find that this legislation did not reduce bank entry rates previous studies did not account for legislative changes that reduced restrictions over branch banking and stimulated growth in the number of branches in about half the states during the 1936 62 period after accounting for these changes in branching laws it becomes clear that entry of new banks was depressed by growth in branch banks not by restrictive federal regulations copyright 1992 by ohio state university press

trade credit and monetary policy transmission recently an increasing number of papers have investigated the role of trade credit as an external source of finance when analyzing the monetary transmission mechanism these works support the balance sheet channel view and at the same time explain the difficulties encountered when looking for evidence in favor of the bank lending channel this paper presents a survey of the emerging literature on the role of trade credit in the transmission of monetary policy trying to link it with the well established credit channel literature copyright blackwell publishers ltd 2005

a comment on the great canadian slump in this comment on fortin 1996 the authors argue that the sluggishness in economic activity in canada in the 1990s is better explained by a combination of factors than by monetary policy alone they find that 1 it is difficult to explain the sluggishness on the basis of the historical relationship between monetary conditions and real activity 2 fortin s evidence of downward nominal wage rigidity is seriously overstated 3 there are several reasons why technological change may have had a larger impact on employment in canada in the 1990s than in the united states and 4 the build up of government debt in the 1980s and 1990s was much more than a cyclical problem associated with monetary policy

instrumental variables procedures for estimating linear rational expectations models abstract this paper illustrates how to use instrumental variables procedures to estimate the parameters of a linear rational expectations model these procedures are appropriate when disturbances are serially correlated and the instrumental variables are not exogenous we compare our procedures to some alternative estimators that estimate free parameters from restrictions implied by the euler equations the procedures are applicable to a variety of linear rational expectations models several examples of which we cite

working capital and fixed investment new evidence on financing constraints this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source of funds the coefficient of endogenous working capital investment is negative in a fixed investment regression as expected if working capital competes with fixed investment for a limited pool of finance this finding addresses a criticism of previous research on finance constraints that cash flows may simply proxy shifts in investment demand in addition previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital

managerial manipulation corporate governance and limited market participation abstract the low fraction of u s households participating in equity markets despite the sizable equity premium has been referred to as the stock market participation puzzle we explore a part of this puzzle by examining the role of managerial manipulation in accounting for the properties of stock market participation we show that when investors have heterogeneous beliefs about managerial manipulation investors who are relatively pessimistic about reporting quality consider stock prices unjustified by the underlying firm value and rationally withdraw from the stock market giving rise to limited market participation in equilibrium our model also suggests that tightened accounting standards have the effect of reducing the dispersion of investor beliefs regarding financial reporting and thus help encourage stock market participation consistent with this idea we find that stronger accounting and governance policies are associated with higher market participation across countries

trade credit in small and medium size firms an application of the system estimator with panel data financing through suppliers is a subject that has been little studied in the economic literature in general and in corporate finance in particular although several hypotheses have been put forward to explain the different reasons behind this phenomenon trade credit is not based on a general theory

an agency model to explain trade credit policy and empirical evidence this article explains trade credit policy based on the agency theory according to this theory we have developed an agency model based on the adverse selection and moral hazard phenomena arising from the relation between sellers and buyers this model has been estimated by using panel data methodology applied to uk companies our findings strongly support the model proposed we find that smaller firms those with a smaller proportion of fixed assets and those that are less profitable extend more trade credit whereas firms with a high proportion of variable costs and high percentage of bad debts extend less

when do trade credit discounts matter evidence from italian firm level data italian firms are top users of trade credit in an international comparison the paper offers some clues to the determinants of this stylized fact exploiting the answers of about 1900 manufacturing firms on a wide range of contractual features separately for domestic and foreign customers the main finding of the univariate analysis is that with the almost totality of transactions made on credit there is no evidence that this way of financing is more expensive than loans an econometric investigation shows that discounts offered have the expected effect of reducing payment delays mostly for customers located abroad where customary credit periods are shorter and creditors rights protection is more effective the result is consistent with the poor explanatory power of discounts received in regressions for the trade debt period of domestic firms