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

Shin-ichi Fukuda (), Munehisa Kasuya and Kentaro Akashi
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Munehisa Kasuya: Research and Statistics Department, Bank of Japan
Kentaro Akashi: Graduate School of Public Policy, University of Tokyo

No CIRJE-F-440, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

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.

New Economics Papers: this item is included in nep-ban and nep-his
Date: 2006-10
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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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