| Firms as Financial Intermediaries: Evidence from Trade Credit Data (2007) | |||||||||||||||
Abstract | |||||||||||||||
| In this paper, we argue that non-financial firms act as intermediaries channeling short-term funds from the financial institutions in an economy to the their greatest use. Non-financial firms act in this way because they may have a comparative advantage in exploiting informal means of ensuring that their borrowers to repay. These considerations suggest that to optimally exploit their advantage in providing trade credit to some classes of borrowers, firms should, when this is efficient, obtain external financing from financial intermediaries and markets. Thus, the existence of a large banking system is consistent with these considerations. Using firm-level data for 39 countries, we compute payables and receivables turnovers and examine how they differ across financial systems. We find that the development of a country’s banking system and legal infrastructure predicts the use of trade credit. Firms ’ use of bank debt relative to trade credit is higher in countries with efficient legal systems. However, firms in countries with larger and privately owned banking systems offer more financing to their customers, and take more financing from them. Our findings suggest that the provision of trade credit is complementary to the development of financial intermediaries and should not be viewed as a substitute by policymakers. 1. | |||||||||||||||
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