Trade Credit, Financial Intermediary Development, and Industry Growth

Trade Credit, Financial Intermediary Development, and Industry Growth

Recent empirical work has shown that financial development is important for economic growth, since well-developed financial markets are more effective at allocating capital to firms with high-value projects. This raises the question of whether firms with high return projects in countries with poorly developed financial institutions, are able to draw on alternative sources of capital, to offset the effects of deficient (formal) financial intermediaries. Recent work suggests that implicit borrowing, in the form of trade credit, may provide one such source of funds. Using the methodology of Rajan and Zingales (1998), the authors show that in countries with relatively weak financial institutions, industries with greater dependence on trade credit financing (measured by the ratio of accounts payable to total assets) grow faster than industries that rely less on such credit. Furthermore, consistent with the notion that young firms may not use trade credit, the authors show that most of the effect they report, comes from growth in preexisting firms, rather than from an increase in the number of firms.

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Bibliographic Details
Main Authors: Fisman, Raymond, Love, Inessa
Language:English
en_US
Published: World Bank, Washington, DC 2001-10
Subjects:ACCOUNTING, ACCOUNTING STANDARDS, ADVERSE SELECTION, ASSETS, ASYMMETRIC INFORMATION, BANK LENDING, BANKING RELATIONSHIPS, BORROWING, CAPITAL EXPENDITURES, CAPITAL MARKETS, CAPITALIZATION, CASH FLOW, COAL, COMPARATIVE ADVANTAGE, CONTRACT ENFORCEMENT, CREDIT, CREDIT MARKETS, CREDIT RATIONING, CREDIT WORTHINESS, CREDITOR, DEBT, DEMAND ELASTICITY, DEPOSITS, DEVELOPED COUNTRIES, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC HISTORY, ECONOMIC PERFORMANCE, ECONOMICS, ECONOMICS LITERATURE, ELASTICITY, EQUITY MARKETS, EXPENDITURES, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIARY DEVELOPMENT, FINANCIAL INTERMEDIATION, FINANCIAL LIBERALIZATION, FINANCIAL MANAGEMENT, FINANCIAL MARKETS, FINANCIAL SECTOR, FIXED COSTS, GDP, GDP PER CAPITA, GROWTH RATE, INDUSTRIALIZATION, INFORMATION ACQUISITION, INVENTORIES, INVENTORY, LIQUIDATION, MARKET POWER, MONETARY AUTHORITIES, PER CAPITA INCOME, PRICE DISCRIMINATION, QUALITY, RESOURCE ALLOCATION, STOCK MARKETS, STOCKS, SUNK COSTS, TRANSACTION COSTS, VALUE ADDED, WEALTH INTERNATIONAL TRADE, CREDIT INTERMEDIARIES, TRADE DEVELOPMENT, FINANCIAL INTERMEDIARY ROLE, INDUSTRY FINANCE, GROWTH PATTERNS, CAPITAL FLOW, FUNDING CAPACITY, CREDIT GUARANTEES, WEALTH, INTERNATIONAL TRADE,
Online Access:http://documents.worldbank.org/curated/en/2001/10/1615097/trade-credit-financial-intermediary-development-industry-growth
https://hdl.handle.net/10986/19512
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Summary:Recent empirical work has shown that financial development is important for economic growth, since well-developed financial markets are more effective at allocating capital to firms with high-value projects. This raises the question of whether firms with high return projects in countries with poorly developed financial institutions, are able to draw on alternative sources of capital, to offset the effects of deficient (formal) financial intermediaries. Recent work suggests that implicit borrowing, in the form of trade credit, may provide one such source of funds. Using the methodology of Rajan and Zingales (1998), the authors show that in countries with relatively weak financial institutions, industries with greater dependence on trade credit financing (measured by the ratio of accounts payable to total assets) grow faster than industries that rely less on such credit. Furthermore, consistent with the notion that young firms may not use trade credit, the authors show that most of the effect they report, comes from growth in preexisting firms, rather than from an increase in the number of firms.

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