Trade debts and bank lending in years of crisis

Abstract

We provide a causal investigation of the substitutability between trade indebtedness and bank loans following credit supply shocks, using a large sample of Italian firms at the time of the sovereign debt crisis. We find a negative and significant elasticity of trade debt to bank loans, consistently with the pecking order theory. This allows firms to rebalance their financial structure, increasing their resilience to external credit shocks. However, the substitutability is found to be much lower or absent for smaller, riskier, highly leveraged firms: weaker firms may not be able to replace bank credit with trade credit when needed.