Trade Credit, Bank Loans, and Monitoring: Evidence from Japan

Yoshiro Miwa () and John Ramseyer

No CIRJE-F-381, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: Firms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect. This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little.

Pages: 49 pages
Date: 2005-10
New Economics Papers: this item is included in nep-cfn, nep-fmk, nep-int and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Trade Credit, Bank Loans, and Monitoring: Evidence from Japan (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2005cf381

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