The Relationship between Trade Credit and Loans: Evidence from Small Businesses in Japan

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10 150 Uesugi and Yamashiro Table 1 Basic sample statistics Observations Mean Standard deviation Minimum Maximum loans loans(short) trade payables reject request request request request request request request sales costsales paymentsite loanplan employment inventory investment cf cash rate score Note: Balance sheet figures are percent changes (log differences). These are the values used in the empirical analysis. Some firms in the sample do not respond to all the survey questions, which reduces the total number of observations for some variables (from a maximum of 2,198). V. THE RELATIONSHIP BETWEEN TRADE CREDIT AND LOANS In Section V-A, we calculate some summary statistics to obtain a general idea about the relationship between trade credit and loans. In Section V-B, we are much more precise about the relationship, and estimate the determinants of trade credit and loans using two-stage least squares (2SLS). A. Summary Statistics We begin our investigation of the trade credit-lending relationship with some summary statistics. Our interest is in determining the driving forces behind a firm s short-term financing decision, specifically the choice between bank loans and trade credit. To get an idea of how this decision is influenced by changes in the sources of financing we calculate the growth rate 13 of the financing variables for each instrumental variable defined in Section IV-B. The use of growth rates allows us to observe the evolution in the credit variables for each instrument.

11 INTERNATIONAL JOURNAL OF BUSINESS, 13(2), Table 2 displays the growth rates of loans, short-term loans, and trade payables for each loan supply instrument (reject and request1 through request7). Table 2 Trade payables, loans, and the instruments affecting the supply of loans Panel (a): Loan application response reject loans loans (short) trade payables Reject (or lesser amount) -7.77% % % Approved (or solicited increase) -2.95% -0.10% -6.06% Panel (b): Main bank request request 1 request 2 request 3 request 4 request 5 request 6 request7 loans loans (short) trade payables Request made by main bank -6.02% -3.09% -6.72% No request -4.45% -2.16% -6.55% Request higher interest rate -6.31% -3.97% -6.28% No request -4.80% -2.12% -6.71% Request additional collateral -4.96% -7.32% 0.35% No request -5.14% -2.31% -6.95% Request additional guarantor -7.18% -7.72% -3.51% No request -5.10% -2.50% -6.67% Request early repayment -9.94% % -0.01% No request -4.96% -1.94% -6.83% Request deposit increase -0.76% -5.30% 2.09% No request -5.18% -2.54% -6.71% Request contract termination (or lower % % 9.68% amount) No request -5.07% -2.49% -6.76%

14 154 Uesugi and Yamashiro Panel (a): Trade payables Table 4 Instrument correlations sales paymentsite trade payables sales 1 paymentsite ( ) 1 trade payables (00) Panel (b): Loans Note: Probability of correlation values being zero is in parenthesis ( ) 1 reject request1 request2 request3 request4 request5 request6 request7 loans reject request1 (0) request2 (0) (0) request3 (0) (0) (0) request4 (0) (0) (0) (0) request5 (0) (0) (0) (0) (0) request6 (7) (0) (0.0018) (0.0012) (4) (0) request7 (0) (0) (1) (0) (0.0760) (0) (0.0513) loans (0.0313) (0.0978) (0.3684) -3 (0.9897) (0.3167) (0.5621) (0.8801) (0.5964) 1 Panel (a): All instruments Table 5 Determinants of trade payables and loans Trade Payables Loans 2SLS OLS 2SLS OLS loans ** (0.513) (0.030) sales *** (0.103) *** (0.055) paymentsite (0.073) (0.053) trade payables *** (0.077) (0.020) reject (0.039) ** (0.036) request (0.029) (0.028)

15 INTERNATIONAL JOURNAL OF BUSINESS, 13(2), request (0.032) (0.031) request (0.047) (0.044) request (0.082) (0.079) request (0.057) (0.055) request (0.099) (0.095) request (0.101) (0.097) loanplan (0.042) (0.020) *** (0.017) *** (0.016) employment inventory *** ** *** investment *** *** cf (0.284) *** (0.158) * (0.146) *** (0.132) cash (0.126) (0.093) (0.081) (0.078) rate score ** (0.010) (0.005) *** (0.004) *** (0.004) constant (0.075) (0.043) ** (0.046) ** (0.044) NOB F-statistic Prob > F Instruments reject sales request1 paymentsite request2 request3 request4 request5 request6 request7 Note: Standard errors in parentheses. ***, **, and * indicates significance at the 1%, 5%, and 10% levels (two-sided), respectively. We find significant correlations between trade payables and sales, loans and reject, and loans and request1. In order to avoid possible endogeneity across instruments, we implement regressions with a limited set of variables. In Table 5, we display the two-stage estimation results for trade payables and loans. In panel (a) we display the results when all available instruments are employed. For comparison, we also include the OLS estimates.

18 158 Uesugi and Yamashiro the substitutability between these two instruments. The majority of these studies have focused on the financing behavior of U.S. firms. While not all of the literature is supportive of the substitutability between trade credit and loans, researchers have generally not argued that they are complements. Studies that have focused on Japan, however, have found some suggestive evidence that trade credit and loans are complements. Our investigation provides much stronger evidence of this fact. We not only find that trade credit and loans positively commove in response to loan shocks, which is what previous studies have found, but also that trade credit and loans positively commove in response to trade credit shocks, which has not been previously documented. Table 6 Determinants of trade payables and short-term loans Panel (a): All instruments Trade Payables Short-term loans 2SLS OLS 2SLS OLS loans (short) (0.182) (0.020) sales *** (0.060) 0.588*** (0.058) paymentsite * (0.057) * (0.056) trade payables (0.129) (0.034) reject *** (0.063) *** (0.060) request (0.049) (0.049) request (0.052) (0.052) request (0.076) (0.072) request (0.130) (0.129) request (0.092) (0.092) request (0.159) (0.157) request (0.158) (0.157) loanplan (0.023) (0.021) * (0.028) 0.050* (0.028) employment inventory ** *** *** *** investment * **

19 INTERNATIONAL JOURNAL OF BUSINESS, 13(2), cf *** (0.165) *** (0.159) (0.230) (0.214) cash (0.108) (0.102) (0.137) (0.137) rate score (0.006) (0.005) ** (0.007) ** (0.006) constant (0.048) (0.045) (0.073) (0.073) NOB F-statistic Prob > F 4 1 Instruments reject sales request1 paymentsite request2 request3 request4 request5 request6 request7 Panel (b): Robustness Instruments: reject, sales Instruments: request, paymentsite Trade Payables Short-term Loans Trade payables Short-term Loans loans (short) * (0.232) (0.321) sales *** (0.067) paymentsite ** (0.062) trade payables (0.132) (0.463) reject *** (0.058) request (0.046) request (0.048) request (0.097) request (0.135) request * (0.096) request (0.168) request loanplan (0.027) * (0.027) (0.032) (0.175) ** (0.027)

20 160 Uesugi and Yamashiro employment inventory *** *** ** investment ** cf (0.185) (0.231) *** (0.202) *** (0.328) cash (0.121) (0.137) (0.122) (0.130) rate score (0.006) ** (0.007) * (0.006) (0.010) constant (0.054) (0.059) (0.058) (0.070) NOB F-statistic Prob > F Instruments reject sales request1 paymentsite request2 request3 request4 request5 request6 request7 Note: Standard errors in parentheses. ***, **, and * indicates significance at the 1%, 5%, and 10% levels (two-sided), respectively. VI. INTERPRETATION OF RESULTS The fact that loans and trade credit are complements has strong implications for the Japanese economy. If it is true that trade credit and loans positively commove, a shock in one market (the loan market or the trade credit market) is amplified by the other. Thus, small businesses in Japan face strong borrowing constraints. This may have been a cause of the severe credit crunch in Japan in the late 1990s. The question is, to avoid a similar situation in the future, what measures must be taken? There are two possibilities. The first is to rely on flexible borrowing from financial institutions. Loan terms, including interest rates, and loan amounts are much more flexible than the terms on trade credit, which is mainly determined by commodity transactions. Hence, loans are much more capable of dampening adverse economic shocks than trade credit. Note, however, that an increase in liquidity in financial markets must be met with proper measures to prevent, or lessen, the possibility of moral hazard. The second possibility is trade credit insurance. Trade credit insurance is offered by private insurance companies, and though the market is still rather small, we have recently seen an increase in the use of insured trade credit. We should expect that as the

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