Does Trade Credit Really Help Relieving Financial Constraints? An analysis on a sample of Italian firms

Stefania Cosci (), Roberto Guida () and Valentina Meliciani ()
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Stefania Cosci: LUMSA University
Roberto Guida: UNINT University of Rome
Valentina Meliciani: LUISS University

No wpC20, CERBE Working Papers from CERBE Center for Relationship Banking and Economics

Abstract: The European Union introduced a Directive aimed at reducing the use of trade credit because it is supposed to affect negatively the European economy. This contrasts with the “redistribution view” arguing that trade credit may allow the financing of credit constrained firms by their more liquid suppliers. Previous empirical analyses found some support for this view but they did not distinguish between net borrowers and net lenders. We show that in Italy the probability to be a net borrower is higher for those firms that are not likely to be credit constrained and that have more market power. Consistently with this result, the substitutability between trade debt and bank short-term debt occurs only for net lenders. These findings cast some doubts on the positive role of trade credit in relieving financial constraints and suggest that regulating late payments can protect vulnerable suppliers from more powerful buyers.

Keywords: Banks; Trade Credit (search for similar items in EconPapers)
Pages: 26 pages
Date: 2017-08
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