Trade Credit and Credit Rationing in Canadian Firms

Rose Cunningham

Economic Analysis (EA) Research Paper Series from Statistics Canada, Analytical Studies Branch

Abstract: Burkart and Ellingsen (2004) develop a model of trade credit and bank credit rationing which predicts that trade credit will be used by medium-wealth and low-wealth firms to help ease bank credit rationing. This paper tests this and other predictions of the Burkart and Ellingsen model using a large sample of more than 28,000 Canadian firms. The author uses an endogenous method to divide the firms into the appropriate wealth categories rather than arbitrarily selecting firms likely to be credit-rationed. The data support the main predictions of the model quite well. The author finds that medium-wealth firms substitute trade credit for bank credit consistent with using it to alleviate bank credit rationing. The low-wealth firms use trade credit but it is positively linked to bank credit, suggesting those firms are constrained in both bank credit and trade credit markets, and so cannot use trade credit to adjust as much to negative shocks. The findings also suggest that there are very few unconstrained, high-wealth Canadian firms. The author also finds low-wealth, declining and distressed firms supply proportionally more trade credit than firms with healthier balance sheets.

Keywords: Business performance and ownership; Financial statements and performance (search for similar items in EconPapers)
Date: 2005-11-04
New Economics Papers: this item is included in nep-fmk and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:stc:stcp5e:2005036e

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