Creditworthy Firms Research Articles

How Do Small Businesses Finance Their Growth Opportunities?—The Case of Recovery from the Lost Decade in Japan

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.

The Academic Analysis of the 2008 Financial Crisis: Round 1

Academics responded to the challenges posed by the 2008 financial crisis with a flurry of studies. This collection of articles is just the academic community's first look into it. The articles begin with an examination at the last national housing price crash: the great depression of the 1930s. This is followed by articles looking at the current mortgage market and how it behaved. Did modern innovations reflect or add to the downturn? The next set of papers examines how non-financial firms were impacted by the crash. To what degree did credit worthy firms nevertheless find themselves without access to capital? The papers then end with a look into how the banking sector itself fared throughout this period.

Relationship Lending in Emerging Markets: Evidence from the Czech Republic

This paper focuses on how firms obtain financing from domestic banks, using a unique loan-level data set for the Czech Republic. The results show that the vast majority of firms use the services of just one relationship lender. Small and young firms in technology- and knowledge-intensive industries tend to concentrate their credit needs in a single bank, whereas less creditworthy firms and firms in cyclical industries tend to borrow from more than one bank. The analysis also reveals different behaviour of firms towards financing banks in case of multiple lenders. Finally, the paper shows that the level of credit risk at the bank level decreases in line with the extent to which firms applying a relationship lending strategy occur in the bank's portfolio.

Liquidity Risk, Maturity Management and the Business Cycle

We use the Shared National Credit data on syndicate loans to investigate U.S. firms’ refinancing behavior over the last two decades. As credit conditions tighten, refinancing likelihood goes down and draw down on loan commitments increases sharply. Surprisingly, refinancing propensity is most sensitive to credit market conditions for credit worthy firms. We show that this is a result of active maturity management by credit worthy firms to avoid being exposed to liquidity risk. Credit worthy firms refinance early at a significantly higher rate when credit conditions are good in order to keep the effective maturity of their loans long. They can then afford to refinance at a lower rate when credit conditions tighten. We show that these results are driven by variation in credit market conditions and not business cycle fluctuation.

Trade Credits and Accounts Payables

The demand for trade credit is considered to be a form of short-term financing that many firms use in order to postpone immediate cash payment, which normally results in improving cash flow. This paper focuses on testing the theoretical determinants on trade credit from the demand side examining whether: 1) - creditworthy firms that have access to both external and internal financing demand trade credits, 2) - that those firms experiencing growth in profits and sales demand trade credit, and 3) - price discrimination by firms can actually influence the demand for trade credit. We use a large sample of 13,193 companies from the UK, and identify whether the decision to demand trade credit as measured by the level of accounts payable depend, on firm's size, or the type of sector in which firms operate in. We draw a distinction between small, medium and large firms, and find evidence that the decision to demand trade credit and the relationship to firm's ability to access finance, their profit and growth, or price discriminate can to a large extent be determined by the size of the firm. When the models are applied to cross sectors, it is evident that firms in the wholesale and retail sectors tend to have significant relationships.

The Supply of Trade Credits: Evidence from the UK

The extension of trade credit is considered to be a form of short term financing that many firms use from both the supply and demand sides. This paper focuses on testing the theoretical determinants on trade credit and examines whether 1) creditworthy firms that have access to both external and internal financing, 2) they experience growth in profits and sales, and 3) price discrimination can actually motivated the extension of trade credit. The paper uses a large sample of data from the UK. We identify whether the decision to offer trade credit as measured by the level of account receivables depends, on firm's size. We draw a distinction between small, medium and large firms, and find evidence that the decision to extend trade credit and the relationship to the firm's ability to access finance, intermediate, or price discriminate can to a large extent be determined by the size of the firm.

Do Firms Get the Financing They Want? Measuring Credit Rationing Experienced by Small Businesses in the U.S.

This paper measures the extent to which small businesses in the United States in the late 1980s were able to access the external credit finance they desired. We argue that a comprehensive definition of credit rationing must account for both (a) creditworthy firms that apply for and are denied financing, and (b) creditworthy firms that decide not to apply for desired external financing, given expectations about how long it may take to obtain financing and the evolution of investment opportunities.

The Relationship between Firm Investment and Financial Status

Firm investment decisions are shown to be directly related to financial factors. Investment decisions of firms with high creditworthiness (according to traditional financial ratios) are extremely sensitive to the availability of internal funds; less creditworthy firms are much less sensitive to internal fund availability. This large sample evidence is based on an objective sorting mechanism and supports the results of Kaplan and Zingales (1997), who also find that investment outlays of the least constrained firms are the most sensitive to internal cash flow.

The Legal Environment, Banks, and Long-Run Economic Growth

This paper examines the relationship between the legal system and banlding development and traces this connection through to long-run rates of per capita GDP growth, capital stock growth, and productivity growth. The data indicate that countries where the legal system (1) emphasizes creditor rights and (2) rigorously enforces contracts have better-developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax. Furtherrnore, the exogenous component of banking development-the component defined by the legal environment-is positively and robustly associated with per capita growth, physical capital accumulation, and productivity growth. THIS PAPER ADDRESSES TWO QUESTIONS. First, do crosscountry differences in the legal rights of creditors, the efficiency of contract enforcement, and the origin of the legal system explain cross-country differences in the level of banking development? Second, do better-developed banks cause faster economic development; that is, is the component of banking development defined by the legal environment positively associated with long-run rates of economic growth, capital accumulation, and productivity growth? Examining the relationship between the legal system and banking development is valuable irrespective of issues associated with long-run growth. First, banks may influence the level of income per capita and the magnitude of cyclical fluctuations (Bernanke and Gertler 1989, 1990). Second, many economists stress that understanding the evolution of legal and financial systems is essential for understanding economic development (North 1981; Engerman and Sokoloff 1996). Consequently, quantitative information on the relationship between the legal environment and banks will improve our understanding of business cycles and the process of economic development. Furthermore, examining the causal links between banks and economic growth has both conceptual and policy implications. On the conceptual front, a long literature debates the importance of banks in economic development. Starting as early as Bagehot (1873), economists have argued that better banks banks that are better at identifying creditworthy firms, mobilizing savings, pooling risks, and facilitating transactions

Further Evidence of Unsatisfied Clienteles in International Capital Financing

AbstractNumerous studies find that shareholders do not gain from the security sales. This study documents a significant exception, new capital offerings by Japanese banks. Market reactions to these sales are significantly positive; however, these issues have two unusual features. First, new convertible bonds and equity shares are simultane‐ously offered. Second, the issues are often denominated in multiple currencies and sold in multiple countries. Tests indicate that the multiple markets/multiple currency feature is strongly related to abnormal performance. These findings are consistent with an unsatisfied clientele in international security sales of creditworthy firms.

Trade Credit, Quality Guarantees, and Product Marketability

Although trade credit has long been an important source of financing for corporations, it is one of the least understood methods of doing business. One possible reason for misconceptions about trade credit is that it is not primarily financial in nature, but instead reflects production and marketing decisions. In this paper, we consider trade credit as a way that firms can guarantee product quality, rather than as a means of financing less creditworthy firms. In this context, we seek, and provide, possible explanations for observed phenomena such as relatively shorter (or no) trade credit terms for consumer and food products and relatively longer terms for heavy industrial equipment.