GCOE Discussion Paper Series
Global COE Program

Human Behavior and Socioeconomic Dynamics
Discussion Paper No.71

Does Trade Credit Provides Favorable Information to Banks?
Evidence from Japan

Takanori Tanaka

July 2009; revised February 2010

GCOE Secretariat
Graduate School of Economics

OSAKA UNIVERSITY

1-7 Machikaneyama, Toyonaka, Osaka, 560-0043, Japan

Does Trade Credit Provides Favorable Information to Banks?
Evidence from Japan ∗Takanori Tanaka †Abstract
This paper examines whether trade credit as a credible signal about firm’s creditworthiness tobanks facilitates provision of bank credit to the firms receiving trade credit. Using data on
Japanese manufacturing firms over the period 1990-1995, we find that firms receiving tradecredit are provided short-term credit by less-informed banks. Consequently, in the firms thathave arm’s-length relations with banks, trade credit plays an important role in mitigating
asymmetric information problems between firms and banks, thereby facilitating extension ofbank credit.

Keywords: Trade Credit; Bank Credit
JEL classification: G32∗

I would like to thank Kazuo Ogawa for valuable comments and suggestions. All remaining
errors are the sole responsibility of the author.
†
Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka
567-0047, Japan. E-mail: t-tanaka@iser.osaka-u.ac.jp

1. Introduction
Trade credit is considered an important short-term source of funding, and there aretheoretical and empirical explanations for the roles played by trade credit. In particular, someprevious studies show that firms facing the difficulty in raising bank credit use trade credit asa substitute (Nilsen, 2002; Mateut et al. 2006).
On the other hand, trade credit plays a role in offering information about firm’s
creditworthiness to banks. Suppliers accumulate information about financial health of buyers
through frequent selling activities, and then are likely to provide credit to the solvent buyers
through trade credit. Moreover, suppliers have a comparative advantage over banks ingathering financial information about buyers (Petersen and Rajan, 1997). Thus, provision of
trade credit is a credible signal about firm’s creditworthiness to banks, and then provides
banks with incentives to extend credit to the firms receiving trade credit. Indeed, Biais and
Gollier (1997) argue that banks observing the provision of trade credit by suppliers have
incentives to extend credit to the buyers about which they would otherwise have limited
information. In addition, Giannetti et al. (2008) show that firms previously receiving tradecredit are affiliated with a large number of distant banks for short-term periods and areoffered lower fees for obtaining bank loans. However, these studies present no evidence of
direct linkage between trade credit and bank credit.
This paper examines whether trade credit as a credible signal about firm’s
creditworthiness to banks facilitates provision of bank credit to the firms receiving tradecredit. As previous studies suggest, the role played by trade credit as a credible signal about
firm’s creditworthiness could be associated with relations between banks and borrowers, andborrowing terms. If trade credit is a credible signal about borrower’s creditworthiness, suchinformation is more valuable for banks that have arm’s-length relations with borrowers
because the banks are less informed about borrower’s creditworthiness. Moreover, extensionof trade credit on a short-term basis could signify borrower’s creditworthiness in the
short-term. Given the discussion above, we propose the hypothesis that if trade credit is acredible signal about firm’s creditworthiness to banks, banks provide short-term credit to thefirms receiving trade credit when the firms have arm’s-length relations with banks.
Using data on Japanese manufacturing firms over the period 1990-1995, we find thatwhen firms having arm’s-length relations with banks receive trade credit, banks provide
short-term credit to the firms receiving trade credit. Moreover, we find no significant
relations between trade credit and short-term bank credit in the firms that have strong
relations with banks. The results are consistent with the view that the extension of tradecredit by suppliers is considered a credible signal about borrower’s creditworthiness by1

less-informed banks, and then banks offer short-term credit to the borrowers receiving tradecredit. Consequently, in the firms that have arm’s-length relations with banks, trade credit
plays an important role in mitigating asymmetric information problems between firms andbanks, thereby facilitating extension of bank credit.

2. Data
Our sample includes 747 Japanese manufacturing firms listed on the stock exchangeover the period 1990-1995 and with fiscal years ending in March. Data on financial
statements for sample firms come from the Nikkei Needs dataset.
We use data on Japanese firms in the early 1990s because a distinction is easily madebetween firms that develop strong relations with banks and firms that do not: keiretsu groupfirms and independent firms. Keiretsu groups are bank-centered groups in which member
firms have strong relations with banks centered at groups and with other same group banks.
These strong connections reduce asymmetric information problems between firms and banks.
In contrast, independent firms that are not affiliated with bank-centered groups havearm's-length relations with banks. Thus, asymmetric information problems between firms
and banks are more severe in independent firms than keiretsu group firms. 1 However, in thelate 1990s and the early 2000s, bankruptcy of banks, and mergers and acquisitions (M&A)
among unhealthy banks resulted into the weakening of bank-firm ties among keiretsu groups.
Therefore, data on Japanese firms in the early 1990s are suitable for distinguishing between
keiretsu group firms and independent firms. Our focus here is on the keiretsu group firmsthat are associated with one of eight keiretsu groups (Mitsubishi, Mitsui, Sumitomo, Fuyo,
Dai-ichi Kangyo, Sanwa, IBJ, and Tokai) and independent firms that are not affiliated witheight keiretsu groups. Sample firms include 298 keiretsu group firms and 449 independent
firms. Identification of keiretsu group membership comes from Industrial Groupings inJapan.
Our dependent variable is Short-term bank loans. This is defined as the change inshort-term loans to the firm by private banks from year t-1 to year t relative to total assets inyear t-1. Data on loans by private banks are obtained from the Nikkei Needs Bank Loan Data.
A list of private banks includes city banks, trust banks, long-term credit banks, first-tierregional banks, and second-tier regional banks.
Among independent variables, our key variable is Trade payables. If trade payables act
as a credible signal about firm’s creditworthiness, and provide less-informed banks withincentives to lend to the firms receiving trade credit, we expect the coefficient on this1

For detailed discussions about keiretsu groups in Japan, see, e.g., Hoshi et al. (1991).

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variable for independent firms to be positive. This is defined as the ratio of accounts andnotes payable to total assets. We need to control for other firm characteristics. Return on
Assets (ROA) is intended to control for profit performance and loan demand, and is definedas the ratio of pre-tax income to total assets. Trade receivables is included to capture thefirm’s ability to extend credit to the buyers, and is defined as the ratio of accounts and notes
receivable to total assets. Debt is intended to control for dependence on external funds, andis defined as the ratio of loans (short- and long-term loans) and corporate bonds (straight,
convertible, and warrant bonds) to total assets. Tangible assets is intended to capture theeffects of collateralizable assets on bank lending, and is defined as the ratio of tangible assets
to total assets. Firm size is included to help control for the difference in firm size, and ismeasured by the logarithm of total assets. Cash is intended to control for internal funds, andis defined as the ratio of cash and deposits to total assets. Sales is intended to control for loan
demand and growth opportunity. This is measured as the change in sales from year t-1 toyear t relative to sales in year t-1.
Table 1 presents the means and standard deviations for the sets of observations ofkeiretsu group firms and independent firms. To ensure the robustness of our results, weremove observations with extreme values from our sample. 2

3. Results
Table 2 reports regression estimates for keiretsu group firms and independent firms. To
avoid endogeneity problems, our specifications include one period lagged values of the
independent variables except for Firm size. The coefficients are estimated using the fixed
effects model. Because of the removal of observations with extreme values, number ofobservations varies with equations.
In first column, Trade payables have no significant coefficient, suggesting that trade
payables play no role in inducing bank credit to keiretsu group firms. Banks centered atkeiretsu groups are well informed about member firm’s creditworthiness through monitoring
activities. Information about creditworthiness may not be important for such well-informedbanks. In contrast, in second column, the coefficient on Trade payables is significantly
positive. The result is consistent with the notion that the extension of trade credit bysuppliers is considered a credible signal about borrower’s creditworthiness by less-informedbanks, and then banks offer short-term credit to the borrowers receiving trade credit in thesubsequent year.
2

Extreme observations are defined as those for which any one of the variables has a value that is more thanfour standard deviations away from the mean value.

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Results in Table 2 support the view that trade credit as a credible signal about firm’s
creditworthiness to banks facilitates provision of short-term bank credit to the firms
receiving trade credit when the firms have arm’s-length relations with banks. However, if theerror terms are serially correlated, our specification faces endogeneity problems.
Furthermore, we need to examine whether the coefficient on Trade payables is larger for
independent firms than for keiretsu group firms.
To address the problems, Table 3 shows additional results. Keiretsu group is a dummy
variable that have a value of 1 if the firms are associated with one of eight keiretsu groups,
and 0 otherwise. Independent group is a dummy variable that have a value of 1 if the firms
are not associated with the keiretsu groups, and 0 otherwise. The estimated coefficients infirst column are identical to those in Table 1. Although the coefficient on interaction term ofTrade payables with Keiretsu group is not significant, the coefficient on interaction term ofTrade payables with Independent group is significantly positive. Test discussed by
Wooldridge (2002) indicates that the null hypothesis that there is no serial correlation in theerror term is not rejected at the conventional levels, suggesting that our specification
overcome endogeneity problems. When we compare the coefficients on Trade payables, thedifference in the coefficients is significant at the 5% level. This indicates that the coefficienton Trade payables is larger for independent firms than for keiretsu group firms. To check therobustness of our results, second column contains the results with different specification.
This yields similar results to those in first column. The null hypothesis of equality of thecoefficients on Trade payables is rejected at the 10% level. In unreported results, we find no
significant relations between trade credit and long-term bank credit in both keiretsu groupfirms and independent firms. Trade credit as short-term credit could indicate short-term
creditworthiness of borrowers, but may be an inadequate signal for long-term
creditworthiness. As a consequence, our results provide support for the view that when firms
having arm’s-length relations with banks receive trade credit, banks provide short-term credit
to the firms receiving trade credit.

4. Conclusion
This paper investigates whether trade credit as a credible signal about firm’s
creditworthiness to banks facilitates provision of bank credit to the firms receiving tradecredit. Using data on Japanese manufacturing firms over the period 1990-1995, empiricalanalyses reveal that when firms having arm’s-length relations with banks receive trade credit,banks provide short-term credit to the firms receiving trade credit. Consequently, in the firmsthat have arm’s-length relations with banks, trade credit plays an essential role in mitigating
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asymmetric information problems between firms and banks, thereby inducing provision ofbank credit.

5References
Biais, B., and C. Gollier, 1997, Trade Credit and Credit Rationing, Review of Financial
Studies, 10, 903-37.
Giannetti, M., M. Burkart and T. Ellingsen, 2008, What You Sell is What You Lend?
Explaining Trade Credit Contracts, Review of Financial Studies, Forthcoming.
Hoshi, T., A. Kashyap and D. Scharfstein, 1991, Corporate Structure, Liquidity, andInvestment: Evidence from Japanese Industrial Groups, Quarterly Journal of Economics, 106,
33-60.
Mateut, S., S. Bougheas and P. Mizen, 2006, Trade Credit, Bank Lending and Monetary
Policy Transmission, European Economic Review, 50, 603-29.
Nilsen, J., 2002, Trade Credit and the Bank Lending Channel, Journal of Money, Credit, andBanking, 34, 226-53.
Petersen, M., and R. Rajan, 1997, Trade Credit: Theories and Evidence, Review of Financial
Studies, 10, 661-91.
Wooldridge, J. M., 2002, Econometric Analysis of Cross Section and Panel Data, MIT Press

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Table 1. Descriptive Statistics
Keiretsu group firms

Independent firms

Variable

Mean

Std.dev.

Mean

Std.dev.

Short-term bank loans

0.002

0.032

0.002

0.032

Trade payables

0.177

0.090

0.170

0.095

ROA

0.029

0.036

0.033

0.044

Trade receivables

0.260

0.094

0.253

0.098

Debt

0.299

0.148

0.250

0.165

Tangible assets

0.279

0.111

0.272

0.119

Firm size

11.3071.387

10.871

1.253

Cash

0.106

0.074

0.129

0.088

Sales

0.010

0.097

0.006

0.115

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Table 2. Trade Credit and Bank Lending
Dependent variable: Short-term bank loans
Independent variable

Keiretsu group firms

Independent firms

Trade payables t-1

0.012

0.141***(0.054)(0.036)－0.087*－0.036(0.045)(0.028)－0.043－0.094***(0.040)(0.028)－0.172***－0.099***(0.026)(0.017)－0.092***0.037(0.034)(0.023)0.021*

0.016*(0.011)(0.008)Hausman test

59.24

83.27

R2

0.059

0.056

No. of observations

1485

2233

ROA t-1
Trade receivables t-1
Debt t-1
Tangible assets t-1
Firm size t

Note
The table reports regression estimates for 298 keiretsu group firms and 449 independent firms over theperiod 1990-1995. Hausman test is a specification test of the fixed effects model versus the variancecomponents model. The coefficients are estimated using the fixed effects model. All equations include
year dummy variables. Standard errors are in parentheses. ***, **, * Significant at the 1%, 5%, and
10% levels, respectively.

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Table 3. Trade Credit and Bank Lending: Additional Results
Dependent variable: Short-term bank loans
Independent variable1

2

Trade payables t-1

0.012

0.046

×Keiretsu group(0.051)(0.053)－0.087**－0.076*

ROA t-1
×Keiretsu group(0.042)(0.043)

Trade receivables t-1－0.043－0.030×Keiretsu group
Debt t-1(0.038)(0.041)－0.172***－0.171***×Keiretsu group(0.024)(0.024)

Tangible assets t-1－0.092***－0.085**×Keiretsu group(0.032)(0.035)

Firm size t

0.021*

0.026**

×Keiretsu group(0.011)(0.011)

Cash t-1

0.029

×Keiretsu group(0.031)

Sales t-1

－0.019×Keiretsu group(0.012)

Trade payables t-1

0.141***

0.155***

×Independent group(0.038)(0.040)

ROA t-1－0.036－0.031×Independent group(0.029)(0.031)

Trade receivables t-1－0.094***－0.094***×Independent group(0.029)(0.032)－0.099***－0.101***×Independent group(0.018)(0.018)

Tangible assets t-1

0.037

0.039

×Independent group(0.024)(0.026)

Firm size t

0.016*

0.015*

×Independent group(0.008)(0.009)Debt t-1

0.006

Cash t-1
×Independent group(0.021)

Sales t-1

－0.006×Independent group(0.009)Hausman test

311.78155.64

Wooldridge test (p-value)

0.181

0.116

2

R

0.101

0.061

No. of observations

3718

3680

Note
The table reports regression estimates for 298 keiretsu group firms and 449 independent firms over the period 1990-1995. Hausman test is a
specification test of the fixed effects model versus the variance components model. The coefficients are estimated using the fixed effects model.
Wooldridge test is a test of serial correlation in the error terms. All equations include interaction terms of year dummy variables with groupdummy variables. Standard errors are in parentheses. ***, **, * Significant at the 1%, 5%, and 10% levels, respectively.

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