The Role of Trade Credit for Small Firms: An Implication from Japan's Banking Crisis

Shin-ichi Fukuda (), Kasuya Munehisa and Akashi Kentaro

No 2006-9, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: Trade credit is one of the most important sources of short-term external finance for small firms. Previous literature has focused mainly on the substitution of bank loans for trade credit during monetary tightening among many firms, but in this paper we investigate the role of trade credit during the banking crisis in Japan. The basic motivation is to explore whether the substitution hypothesis still holds even under serious financial turbulence. Our main results suggest that the substitution hypothesis held in Japan when the banking sector was healthy, but broke down during the banking crisis. More precisely, both bank loans and trade credit contracted simultaneously during the crisis. Deteriorated bank health might have been primarily responsible for the widespread declines of credit to small and medium size firms in Japan during the banking crisis.

Keywords: Trade credit; Bank-firm relationship; Unlisted firms (search for similar items in EconPapers)
JEL-codes: G21 G33 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cfn
Date: 2006-10
Note: October, 2006
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Working Paper: The Role of Trade Credit for Small Firms: An Implication from Japan's Banking Crisis (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:hit:hitcei:2006-9

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