The Determinants of Corporate Trade Credit Policies in a Bank‐dominated Financial Environment: the Case of Finnish Small Firms

This paper examines trade credit policies of small firms operating in a bank‐dominated environment (Finland). We find that creditworthiness and access to capital markets are important determinants of trade credit extended by sellers. The level of purchases is positively correlated with the level of accounts payable. Larger and older firms and firms with strong internal financing are less likely to use trade credit, whereas firms with a high ratio of current assets to total assets, and firms subject to loan restructurings use it more. Negative loan decisions by financial intermediaries increase and a close bank‐borrower relationship decreases the probability that a firm does not take advantage of trade credit discounts.     

Collateral damaged? Priority structure,credit supply,and firm performance

A unique legal reform in 2004 in Sweden redistributed collateral rights from banks holding floating liens to unsecured creditors without changing the value of assets on firms’ balance sheets. Using a country-wide panel of all incorporated firms, we document that a zero-sum redistribution of collateral rights and the resulting reduction in collateral capacity towards banks contracts the amount and maturity of corporate debt and leads firms to slow investment and forego growth. Altering their allocation of assets, firms reduce particularly those assets with a low collateralizable value for banks and also hoard more cash. However, the reform has no impact on corporate capital intensity or efficiency, suggesting that under these newly binding credit constraints firms simply shrink their operations.     

Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default

I study the impact of Lehman Brothers' bankruptcy and resultant inability to honor its obligations as a lender under committed credit lines. Firms that lost access to a credit line committed by Lehman Brothers experienced abnormal stock returns of − 3%, on average, on the day of and day after Lehman's bankruptcy filing, amounting to roughly $5.7 billion in aggregate, risk-adjusted losses. These losses were significantly larger for firms that were more financially constrained, firms with less cash, firms for whom Lehman was a lead-bank, and firms that lost access to larger amounts of committed credit. During the four quarters immediately following Lehman's collapse, firms that lost access to a credit line cut their investment spending significantly while simultaneously hoarding more cash than comparable firms. Overall, these findings indicate that firms that lost access to a credit line incurred economically significant costs and real-side consequences as a result of Lehman's default on its loan commitments.     

Asset redeployability and trade credit

We examine the relationship between asset redeployability and firms' use of trade credit. Using a large sample of US public firms, we document that firms with more redeployable assets use significantly less trade credit. Our cross-sectional analyses show that the negative relation between asset redeployability and trade credit is more salient for firms with more financing constraints, high levels of information asymmetry, and less corporate liquidity. These findings remain robust to alternative measures of asset redeployability, trade credit, and alternative regression specifications, and they are not driven by an endogeneity problem. Finally, we find that firms with fewer redeployable assets adjust trade credit to the target level relatively quickly when compared with firms having more redeployable assets. Overall, findings from this study provide robust evidence that asset redeployability has an important bearing on firms' short-term financing.     

Private and Public Merger Waves

We document that public firms participate more than private firms as buyers and sellers of assets in merger waves and their participation is affected more by credit spreads and aggregate market valuation. Public firm acquisitions realize higher gains in productivity, particularly for on‐the‐wave acquisitions and when the acquirer's stock is liquid and highly valued. Our results are not driven solely by public firms' better access to capital. Using productivity data from early in the firm's life, we find that better private firms subsequently select to become public. Initial size and productivity predict asset purchases and sales 10 and more years later.     

An Empirical Analysis of the Effect of Financial Distress on Trade Credit

This paper studies the use of supplier's trade credit by firms in financial distress. Trade credit represents a large portion of firms’ short‐term financing and plays an important role in financial distress. We find that firms in financial distress use a significantly larger amount of trade credit to substitute for alternative sources of financing. Firms that are smaller, with less market power, and with more unique products tend to use more trade credit financing when in distress. We also find that firms that significantly increase their trade payables when in financial distress, experience an additional drop of at least 11% in sales and profitability growth over the previously documented 21% average drop for financially troubled firms.     

How Do Firms Choose Between Intermediary and Supplier Finance?

This paper examines firms’ short‐term financing choices between intermediated loans and trade credit. I test two sets of empirical hypotheses: 1) hypotheses concerning the cross‐sectional differences in the level of intermediary finance for firms that use different levels of trade credit and 2) hypotheses concerning the dynamics of trade credit growth. I find strong evidence that for firms with high agency costs, the use of trade credit facilitates access to conventional bank loans. The evidence is consistent with theories based on the signaling role of trade credit provision and suppliers’ liquidation advantage.     

How important are small banks to small business lending?: New evidence from a survey of small firms

Typically, small banks lend a larger proportion of their assets to small businesses than do large banks. The recent wave of bank mergers has thinned the ranks of small banks, raising the concern that small firms may find it difficult to access bank credit. However, bank consolidation will reduce small business credit only if small banks enjoy an advantage in lending to small businesses. We test the existence of a small bank cost advantage in small business lending by conducting the following simple test: If such advantages exist, then we should observe small businesses in areas with few small banks to have less bank credit. Using data on small business borrowers from the 1993 National Survey of Small Business Finance, we find that the probability of a small firm having a line of credit from a bank does not decrease in the long run when there are fewer small banks in the area, although short-run disruptions may occur. Nor do we find that firms in areas with few small banks are any more likely to repay trade credit late, suggesting that such firms are no more credit constrained than firms in areas with many small banks.     

How does corporate social responsibility have influence on firms' access to trade credit

This study identifies and examines the channels through which corporate social responsibility (CSR) impacts firms' access to trade credit. Using a sample of Chinese firms, we identify two channels through which CSR impacts firms' access to trade credit: (i) better CSR performance reduces firms' systematic risk; and (ii) better CSR performance enhances trust from suppliers. We also document that the positive effect that CSR has on firms' access to trade credit is more pronounced in firms with limited access to formal financial resources, i.e., in non-state-controlled enterprises, especially those without political connections, and in firms located in regions with a lower level of social trust. Our findings are robust to a series of tests that address the endogeneity issue. Overall, we argue that CSR performance enhances firms' access to trade credit through the channels of systematic risk and trust enhancing.     

Government Credit,a Double‐Edged Sword: Evidence from the China Development Bank

Using proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state‐owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows.     

Anticompetitive Financial Contracting: The Design of Financial Claims

This paper presents the first model where entry deterrence takes place through financial rather than product‐market channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, equity. This contrasts with the standard Brander and Lewis (1986) result that debt deters entry. This effect is more marked the less competitive the credit market is—so more credit market competition spurs more product market competition.     

The Role of Auditing Firms in the Implementation of New Accounting Standards: Evidence from China

This paper explores the impact of auditing firms on the implementation of the new Chinese Accounting Standards for Enterprises 22 (new CAS 22), which converges with IFRS 9. We find that the Big4 firms focus on fair value measurement and application of the expected credit loss (ECL) impairment model, whereas the LocalTop6 firms primarily focus on the classification of financial assets. The results indicate that effective implementation of the new standards mainly depends on standardized procedures and professional techniques of auditing firms, as the Big4 firms exhibit better implementation of the new standards in terms of items that generate greater risk and uncertainty than do local large auditing firms in China. In addition, we further test how cross-listing affects the role of auditing firms in implementing the new standards and find that the Big4 firms play a more significant role for A-share only companies than A + H companies. The findings reveal the challenges associated with implementation of IFRS 9-based new CAS 22 in China.     

Stiffing the creditor: Asset verifiability and bankruptcy

Evidence suggests that asset pledgeability, debt complexity, and control rights of dispersed debt influence financial distress resolution. We model how courts’ imperfect verifiability of assets and valuable control of misaligned creditors shape firms’ debt structure and create coordination problems that determine distress outcomes and financing. A key result is that an increase in verifiability allows financially constrained firms to fund projects by pledging more assets to misaligned creditors, making contract renegotiation in distress times more difficult and increasing the probability of bankruptcy. Since equity receives less in the event of distress, constrained firms choose riskier projects with higher returns. Consistent with our model, bankruptcy filings increase after the U.S. Supreme Court decision imposing a “market test” to assess the value of stockholders’ interest in debtor proposals. The effect is stronger for firms with low asset verifiability. These firms also experienced an increase in recovery rates, debt capacity, and risk-taking. Our findings suggest that reforms improving the verifiability of assets substantially impact credit access. However, our results also point out that improving asset verifiability may be insufficient for constrained firms with aligned creditors. Therefore, complementary reforms that facilitate firms’ access to creditors from different market segments may be necessary.     

Bank Relationships and Firms' Financial Performance: The Italian Experience

We examine the connection between the number of bank relationships and firms' performance using a unique data set on Italian small firms for which banks are a major source of financing. Our evidence indicates that return on equity and return on assets decrease as the number of bank relationships increases with a stronger effect on small firms than large firms. We also find that interest expense over assets increases as the number of relationships increases. Particularly for small firms, these results are consistent with analyses suggesting that fewer bank relationships reduce information asymmetries and agency problems and outweigh hold‐up problems.     

The impact of foreign bank entry in emerging markets: Evidence from India

This paper uses the entry of foreign banks into India during the 1990s—analyzing variation in both the timing of the new foreign banks’ entries and in their location—to estimate the effect of foreign bank entry on domestic credit access and firm performance. In contrast to the belief that foreign bank entry should improve credit access for all firms, the estimates indicate that foreign banks financed only a small set of very profitable firms upon entry, and that on average, firms were 8 percentage points less likely to have a loan after a foreign bank entry because of a systematic drop in domestic bank loans. Similar estimates are obtained using the location of pre-existing foreign firms as an instrument for foreign bank locations. Moreover, the observed decline in loans is greater among smaller firms, firms with fewer tangible assets, and firms affiliated with business groups. The drop in credit also appears to adversely affect the performance of smaller firms with greater dependence on external financing. Overall, this evidence is consistent with the exacerbation of information asymmetries upon foreign bank entry.     

The impact of monetary policy on the financing behaviour of firms in the Euro area and the UK

Abstract

According to the ‘broad credit view’ bank-dependent firms are more strongly affected by monetary contractions than firms with access to non-bank forms of external finance. Within the credit view the bank lending channel focuses on the special role of bank loans, and predicts that monetary contractions reduce loan supply to firms facing information problems. However, the ‘relationship lending channel’ argues that, especially in bank-based economies, bank-dependent firms have close ties with banks, which may reduce the sensitivity of their use of bank debt to monetary shocks. The sensitivity of corporate debt structures to changes in the monetary policy stance is analysed using a sample of 22,000 firms in the Euro area and the UK. Evidence is found for the credit view, the relationship lending channel, but not for the bank lending channel.     

Distressed Debt Restructuring in the Presence of Credit Default Swaps

The availability of credit insurance via credit default swaps has been closely associated with the emergence of empty creditors. We empirically investigate this issue by looking at the debt restructurings (distressed exchanges and bankruptcy filings) of rated, nonfinancial U.S. companies over the period January 2007–June 2011. Using different proxies for the existence of insured creditors, we do not find evidence that the access to credit insurance favors bankruptcy over a debt workout. However, we document higher recovery prices following a distressed exchange in firms where empty creditors are more likely to emerge.     

Credit Crunch and Target Capital Structure: Empirical Studies Based on Natural Experimentin China

Abstract:

Data from China’s credit crunch, which started in 2007, is utilized to establish a natural experiment to investigate the impact of the credit crunch on target capital structures. The sample consists of 1,128 listed companies in China during the period 2000–2011. The interest-bearing debt to total assets ratio is used as a representative indicator for capital structures. The results indicate that the credit crunch was associated with a decrease in the target debt ratios for all listed companies. Small firms, privately owned enterprises, and firms with weak mortgage capabilities responded more sensitively to the credit crunch by showing a substantial decrease in target debt ratios.     

Formal finance and trade credit during China's transition

Using a large panel dataset of Chinese industrial firms, we find that poorly performing SOEs were more likely to redistribute credit to firms with less privileged access to loans via trade credit. While that could be consistent with the efficient redistribution of credit, it is more likely that these SOEs extended trade credit to prop up faltering customers that were in arrears. By contrast, profitable private domestic firms were more likely to extend trade credit than unprofitable ones. Trade credit likely provided a substitute for loans for these firms' customers that were shut out of formal credit markets. As biases in lending become less severe, the allocation of lending became more efficient, and the amount of trade credit extended by private firms declined. Our evidence implies that redistribution of bank loans via trade was not a major contributor to China's explosive growth.     

Corporate Disclosures of the Major Sources of Estimation Uncertainties

We investigate compliance with regulatory requirements by the largest 20 Australian listed firms to disclose key assumptions and major sources of estimation uncertainties. These relate to accounting estimates that require management's judgement in measuring the carrying amount of the entity's assets and liabilities. While we find that firms provide some disclosure, the information is not sufficiently informative to give users meaningful insights. Overall, the level of disclosure falls short of the intentions of the relevant requirements. Our findings suggest that additional guidance may be necessary to improve compliance and thus increase the information value that these disclosures contribute to financial reports.