The Signalling Role of Trade Credit on Loan Contracts: Evidence from a Counterfactual Analysis

Pasqualina Arca, Gianfranco Atzeni and Luca Deidda

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: We study the role of trade credit in reducing the information asymmetries between firms and banks. According to the Biais and Gollier's (1997) model trade credit is a complement to bank credit as it is used to convey information to the bank about firm quality, thereby alleviating bank credit rationing. By employing a switching regression approach and taking into account the endogeneity arising from the simultaneous decisions of the bank to extend credit and the firm to use trade credit, we find that (i) the firm decision to use trade credit is a self-selection mechanism; (ii) any firm that chooses to use trade credit would benefit from a reduction in the cost of credit, with this reduction greater for firms that actually use trade credit; (iii) firms that use trade credit have a higher probability of obtaining financing. Thus, using a methodology that allows us to account for the role of private information in the firm- bank relationship, our results provide support to the signalling role of trade credit.

Keywords: Trade credit; Signalling; Endogenous Switching Regression; Bank Credit; asymmetric information (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cfn and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202106

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