Abstract
Previous studies argue that bank loans are cheaper than trade credit, so less‐constrained firms largely depend on bank loans and use trade credit less, especially in financially developed economies. However, the Japanese evidence does not support this view. First, small businesses with higher credit demand increase trade credit more during the period of the recovery from a severe recession. Second, creditworthy firms also increase trade credit to finance their growth opportunities. Third, firms in unstable industries increase trade credit more. This suggests that suppliers are able to offer credit, unlike banks, as they have a relative advantage in day‐by‐day monitoring. Copyright © 2012 John Wiley & Sons, Ltd.
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