does trade credit boost firm performance abstractsome firms have achieved good performance in developing countries where the financial sector is far from established one explanation in the literature is that these firms benefit from trade credit a form of informal financing using a survey of firms in china conducted by the world bank in early 2003 this article examines whether trade credit indeed boosts firm performance our ordinary least squares results show that trade credit is significantly and positively correlated with firm performance however using the instrumental variable approach to address endogeneity we find that the statistical significance disappears the results are robust to a series of robustness checks casting doubt on the claim that trade credit boosts firm performance

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

rational ponzi games when can a government run a rational ponzi game i e issue debt and never pay back any interest or principal the transversalit y condition of each individual implies that such schemes require an i nfinity of lenders given this horizons are unimportant ponzi games cannot be ruled out by assuming that agents have infinite horizons the authors point out both the basic similarity of and some key diff erences between rational ponzi games and asset price bubbles or fiat money regarding international debt the analysis implies that what matters for the feasibility of rational ponzi games are conditions in the lenders not the borrowers economy copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimism pessimism and financial bubbles this paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank dependent expected utility this rdu assumption can be viewed as a transformation of probabilities depending on the pessimism optimism of the agent the results show that pessimism favors the existence of deterministic bubbles when optimism may promote the existence of stochastic bubbles moreover under pessimism the rdu assumption may generate multiple bubbly equilibria the rdu assumption also leads to new conditions ensuring the absence of pareto optimality of the competitive equilibrium without bubbles these conditions still govern the existence of bubbles

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

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

speculative growth hints from the u s economy we propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations we interpret this phenomenon as a high valuation equilibrium with a low cost of capital based on optimism about future funding the key ingredient for such equilibrium is feedback from increased growth to a decline in the long run cost of capital this feedback arises when an expansion comes with technological progress in the capital sector when fiscal rules generate procyclical fiscal surpluses when the rest of the world has lower expansion potential or high saving needs and when financial constraints are relaxed by the expansion itself

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

trade credit and informational asymmetry commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held by offering trade credit a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short term financing the information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments traditional explanations for the widespread use of trade credit fall into two categories the financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions ferris 4 argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances emery 3 contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit however the financing motive is not sufficient to explain why small suppliers offer trade credit the wide cross sectional variation in terms or why large buyers often take the prompt payment discount late a second set of explanations is best described as pricing motivations for trade credit provision nadiri 10 argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions schwartz and whitcomb 14 argue that trade credit is used to circumvent robinson patman and similar prohibitions on price discrimination the correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller although the explanation is possible in principle an empirical question remains as to why variations in actual credit terms appear to be based on product market rather than buyer characteristics the literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows schwartz 13 for example employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets however a microeconomic

increasing returns and crowding out abstract this paper explores how public debt interferes with the accumulation of physical capital when the technology displays a production externality of the arrow romer type we identify conditions under which a small positive amount of debt will prevent the economy from ever approaching the stock of capital that it would achieve if public debt were zero we also show that the interaction of debt and production externalities may produce bounded possibly cycling capital stock sequences in economies where sustained growth rates are possible with zero national debt finally welfare issues concerning the relation between static and dynamic inefficiencies are discussed

taxation bubbles and endogenous growth we study the interplay between taxation bubble formation and economic growth a rational bubble may be beneficial when growth is fueled by public investment or r d externalities and the government levies taxes on bubble returns to finance this investment our main result challenges the conventional view about the negative effect of bubbles in endogenous growth grossman and yanagawa 1993

an incentive compatible solution for trade credit term incorporating default risk abstract this paper studies the optimal trade credit term decision in an extended economic ordering quantity eoq framework that incorporates a default risk component a principal agent bilevel programming model with costs minimization objectives is set up to derive the incentive compatible credit term the supplier determines the credit term as the leader in the first level programming by balancing her his financing capacity with the retailer s default risk order behavior and cost shifting at the second level the retailer makes decisions on ordering and payment time by reacting on the term offered by the supplier a first order condition solution procedure is derived for the bilevel programming when credit term is confined within the practically feasible interval two key results are obtained the condition to derive incentive compatible credit term and an equation system to derive threshold default risk criterion filtering retailers suitable for credit granting numerical experiments show that the capital cost of the supplier is the most important factor determining the credit term default risk acts like a filtering criterion for selecting retailers suitable for credit granting empirical evidence supporting our theoretical considerations is obtained by estimating three panel econometric models using a dataset from china s listed companies

the effect of economic uncertainty on inventory and working capital for manufacturing firms abstract this paper develops an empirical model to investigate the impact of macro economic risk on working capital and the various types of inventory our analysis helps manufacturing firms anticipate the implications of high macro economic risk measured through the economic policy uncertainty epu index on their operations using a sample of 6503 us manufacturing firms during the period 1990 2018 we show that epu drives high levels of inventory thus corroborating existing theories about random disruptions raising safety stock levels we also show that increased economic uncertainty yields higher trade credits payables and working capital thus requiring firms to tie more capital to their operations our results are statistically significant yet these effects are small at the firm level the results are robust when applying the monetary policy uncertainty mpu index to the subsample of the data from 1990 to 2007 instead of the epu index to the same data set

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

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

trade credit and the bank lending channel the bank lending channel theory posits that during monetary contractions banks restrict some firms loans thus reducing their desired investment independently of interest rates previous research finds small firms reduce while large firms accelerate loan growth we find that small firms increase trade credit a substitute credit indicating a strong loan demand it supports the bank lending channel they do not voluntarily cut bank loans since they increase a less desirable alternative using trade credit is propitious since unlike commercial paper investigated by previous researchers it is widely used by the small firms suffering the loan decline surprisingly we also find large firms increase trade credit a puzzle since they are typically assumed to have wide access to other credit using individual manufacturing firm data we find the reasons large firms use trade credit are financial in nature those without a bond rating increase trade credit that is without access to open market credit as relatively few firms have this mark of quality it implies that more firms are affected by credit constraints than previously believed

economic growth with bubbles this paper presents a stylized model of economic growth with bubbles this model views asset price bubbles as a market generated device to moderate the effects of frictions in financial markets improving the allocation of investments and raising the capital stock and welfare the model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms and therefore the rate of economic growth the model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth

in kind finance a theory of trade credit it is typically less profitable for an opportunistic borrower to divert inputs than to divert cash therefore suppliers may lend more liberally than banks this simple argument is at the core of our contract theoretic model of trade credit in competitive markets the model implies that trade credit and bank credit can be either complements or substitutes among other things the model explains why trade credit has short maturity why trade credit is more prevalent in less developed credit markets and why accounts payable of large unrated firms are more countercyclical than those of small firms

focusing the financial flow of supply chains an empirical investigation of financial supply chain management the objective of this paper is to establish a theoretical foundation for financial supply chain management fscm in order to strengthen managerial decisions concerning financial flows in supply chains although such decisions are made frequently and partial aspects of fscm are already understood in business practice empirical knowledge about fscm is in its early stages the study provides fundamental information derived from eight case studies based on 40 interviews the analysis extends previous studies of the interface between operations management and finance by i contributing to a mid range theory of fscm by exploring two distinct but not exclusive fscm categories their antecedents and performance effects ii empirically deriving a testable framework for fscm iii relating fscm to established theories in the field of scm and iv basing the analysis on transaction cost economics managerial insights reveal that weak working capital causes firms to focus on fscm more specifically the study identifies two fscm categories pre shipment fscm before invoice release and post shipment fscm after invoice release managers can improve upstream supply chain working capital with pre shipment fscm whereas post shipment fscm strengthens the buying firm s working capital position based on transaction cost economics we analyze how these improvements stem from risk reductions which are more effective if firms are integrated internally and externally

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

monopolistic competition dynamic inefficiency and asset bubbles abstract we emphasise the importance of the market structure to determine whether dynamic inefficiency is possible in a closed economy we analyse alternative monopolistic competition frameworks where the existence of pure profit involves the presence of an asset market when entry is blockaded dynamic inefficiency is prevented as each firm uses a discount rate higher than the output growth rate in evaluating future profits when entry is free but involves sunk costs we need to distinguish between the possibility of asset bubbles and dynamic inefficiency the condition for the latter being more stringent if entry costs increase with per capita output dynamically inefficient equilibria are possible only when population grows

health insurance and mortality experimental evidence from taxpayer outreach we evaluate a randomized pilot study in which the irs sent informational letters to 3 9 million taxpayers who paid a tax penalty for lacking health insurance coverage under the affordable care act drawing on administrative data we study the effect of the intervention on taxpayers subsequent health insurance enrollment and mortality we find the intervention led to increased coverage in the two years following treatment and that this additional coverage reduced mortality among middle aged adults over the same time period our results provide the first experimental evidence that health insurance reduces mortality

trade credit collateral liquidation and borrowing constraints assuming that firms suppliers are better able to extract value from the liquidation of assets in default and have an information advantage over other creditors the paper derives six predictions on the use of trade credit 1 financially unconstrained firms with unused bank credit lines take trade credit to exploit the supplier s liquidation advantage 2 if inputs purchased on account are sufficiently liquid the reliance on trade credit does not depend on credit rationing 3 firms buying goods make more purchases on account than those buying services while suppliers of services offer more trade credit than those of standardized goods 4 suppliers lend inputs to their customers but not cash 5 greater reliance on trade credit is associated with more intensive use of tangible inputs 6 better creditor protection decreases both the use of trade credit and input tangibility

bubbles and capital flows abstract this paper presents a stylized model of international trade and asset price bubbles its central insight is that bubbles tend to appear and expand in countries where productivity is low relative to the rest of the world these bubbles absorb local savings eliminating inefficient investments and liberating resources that are in part used to invest in high productivity countries through this channel bubbles act as a substitute for international capital flows improving the international allocation of investment and reducing rate of return differentials across countries this view of asset price bubbles could eventually provide a simple account of some real world phenomena that have been difficult to model before such as the recurrence and depth of financial crises or their puzzling tendency to propagate across countries

the price of reverse factoring financing rates vs payment delays reverse factoring a financial arrangement where a corporation facilitates early payment of its trade credit obligations to suppliers is increasingly popular in industry many firms use the scheme to induce their suppliers to grant them more lenient payment terms by means of a periodic review base stock model that includes alternative sources of financing we explore the following question what extensions of payment terms allow the supplier to benefit from reverse factoring we obtain solutions by means of simulation optimisation we find that an extension of payment terms induces a non linear financing cost for the supplier beyond the opportunity cost of carrying additional receivables furthermore we find that the size of the payment term extension that a supplier can accommodate depends on demand uncertainty and the cost structure of the supplier overall our results show that the financial implications of an extension of payment terms need careful assessment in stochastic settings

credit contagion from counterparty risk standard credit risk models cannot explain the observed clustering of default some times described as credit contagion this paper provides the first empirical analysis of credit contagion via direct counterparty effects we find that bankruptcy announce ments cause negative abnormal equity returns and increases in cds spreads for credi tors in addition creditors with large exposures are more likely to suffer from financial distress later this suggests that counterparty risk is a potential additional channel of credit contagion indeed the fear of counterparty defaults among financial institu tions explains the sudden worsening of the credit crisis after the lehman bankruptcy in september 2008

confidence and the real value of money in an overlapping generations economy we demonstrate that stochastic bubbles which have a constant exogenous probability of collapsing may exist in general equilibrium on an intrinsically useless and unbacked asset money this may happen provided that the probability q that the bubble will persist next period is large enough and exceeds a threshold level q which we call the minimum rate of confidence this condition is always violated when the economy without bubble is dynamically efficient it is more likely to be satisfied in dynamically inefficient economies the larger the size of the inefficiency as measured by the excess of the growth rate over the no bubble interest rate we study both exchange and production economies

a transactions theory of trade credit use this paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint costs of exchange in the formal analysis uncertain delivery time is used to generate a demand by firms to hold inventories of both goods and money trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present in the exchange of goods by forewarning both trading partners of the timing of money flows credit permits a reduction in precautionary money holdings and the more effective management of net money accumulations

growth opportunities and trade credit evidence from chinese listed firms abstractprivate firms in china have led the explosive growth of the country s economy but with restricted or no access to formal financing it is puzzling that these firms use relatively less trade credit than their counterparts in developed countries we argue that firms with more growth opportunities should rely mainly on internal financing owing to high asymmetric information especially in a financial market environment biased towards state owned enterprises soes such as china to explore growth opportunities these firms may reduce their level of trade credit in the trade off they face in deciding where to invest using panel data of chinese non financial listed firms for the period 2003 2013 we find that the relationship between growth opportunities and trade credit both accounts receivable and payable is significantly negative and is more pronounced in private firms than in soes furthermore we also find that subsequent to the new receivable pledge policy being introduced chinese firms with

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

does unfunded social security also depress output growth abstract it is well known that unfunded social security reduced fertility and more likely depresses savings does it also depress output growth this paper addresses the question in a framework of both endogenous fertility and growth it is found that social security may induce higher growth if the fertility effect dominates the savings effect

the commitment problem of secured lending the paper presents a new theory of trade credit in which firms buy inputs on credit from suppliers to restore the benefits of secured bank financing impaired by contract incompleteness in a setting where investment is endogenous and unobservable to financiers we show that a bank secured credit contract is time inconsistent upon being granted credit the entrepreneur has an incentive to alter the original input combination jeopardizing the bank s revenues anticipating the entrepreneur s opportunism the bank offers an unsecured credit contract reducing the surplus from the venture one way for the entrepreneur to commit to the contract terms is to purchase inputs on credit from the supplier the supplier observes the input investment and acts as a guarantor that inputs will be purchased as contracted thus facilitating access to secured bank financing the commitment role of trade credit still holds in a multi period extension that investigates the impact of bank relationship lending on secured debt and trade credit our model provides novel testable predictions on optimal financial contracts in both one period and repeated lending relationships

the value of private sector business credit information sharing the us case this paper investigates the value added by private information exchanges that share information on business payment performance we discuss how this information is collected and disseminated by the worlds largest private information broker dun bradstreet we provide the first empirical examination of the importance of this information at the lending decision level our findings indicate that exchange generated information provides significant explanatory power in failure prediction models controlling for other credit information that is easily available to lenders our study complements the work of jappelli and pagano information sharing lending and defaults cross country evidence centre for economic policy research discussion paper 2184 1999 who find in cross country macro level tests that information exchanges add value 2003 elsevier science b v all rights reserved

does trade credit redistribution thwart monetary policy evidence from italy italy is an ideal candidate for testing the credit view of the transmission mechanism because of a bank centred financial structure a sizeable trade debt and an economy titled towards small firms an empirical analysis of trade credit and debt on averaged panel data shows that small firms act as financially constrained and cycle sensitive whereas large ones aim at smoothing sales adopt an integrated management of inventories and receivables and have a higher trade debt to purchases elasticity on balance the net trade credit channel does not as implied by the credit view shield small firms from a monetary squeeze

the source of fluctuations in money evidence from trade credit abstract this paper tests the relative importance of technology shocks and financial shocks as sources of fluctuations in money the model extends the theory of king and plosser 1984 by recognizing that both money and trade credit provide transactions services under certain conditions the co movements between money and trade credit can reveal the nature of the underlying shocks the empirical results strongly suggest that shocks to the financial system account for most of the fluctuations in money in the long run and at business cycle frequencies on the other hand technology shocks appear to be more important at seasonal frequencies

asset bubbles and endogenous growth abstract we study the interaction between productive and nonproductive savings in economies with endogenous long run growth as in the neoclassical growth setting with overlapping generations asset bubbles can exist in an economy with endogenous growth provided that they are not too large and that the growth rate in the equilibrium without bubbles exceeds the interest rate here the existence conditions for bubbles reflect parameters of tastes and technology we find that bubbles when they exist retard the growth of the economy perhaps even in the long run and reduce the welfare of all generations born after the bubble appears

trade credit and supplier competition abstract this paper examines how competition among suppliers affects their willingness to provide trade credit financing trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers leading to a free rider problem a supplier that represents a smaller share of the retailer s purchases internalizes a smaller part of the benefit from increased spending by the retailer and as a result extends less trade credit relative to its sales in consequence retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated the free rider problem is especially detrimental to a trade creditor when the free riding suppliers are its product market competitors leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter we test the model using both simulated and real data the estimated relations are consistent with the model s predictions and are statistically and economically significant

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

corporate trade credit and inventories new evidence of a trade off from accounts payable and receivable abstract trade credit is an important source of finance for firms and has been well researched but the focus has been on financial trade offs in this paper we consider the trade offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit our model identifies the response of accounts payable and accounts receivable to changes in the cost of inventories profitability risk and liquidity and importantly this influence operates through a production channel our results support the model and complement many existing studies focused on explaining the financial terms of trade credit