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Firms as Financial Intermediaries: Evidence from Trade Credit Data

A key question in development economics is the relation between a country’s financial system and its economic development. The empirical literature addressing this question has focused on the role of banks and stock markets in providing the financing to the commercial sector. This approach is motivated by the fact that in a perfectly functioning financial market the financing should be from financial intermediaries and markets that specialize in the supply of external finance.

In this paper, we broaden the focus and ask whether the state of development of a country’s financial system and its legal system affect the provision of short-term capital by corporations.

Even in well developed market economies, such as the United States, the supply of capital is frequently bundled with the supply of goods, in the form of trade credit, and vendor financing more generally. Lee and Stowe (1993) calculate that the amount of trade credit in 1985 "far exceeded the business lending of the entire banking system." Rajan and Zingales (1995) present evidence that 18% of the total assets of US firms in 1991 consists of accounts receivable funds loaned to customers. In countries such as Germany, France and Italy, trade credit exceeds a quarter of total corporate assets.

While the use of trade credit is wide-spread, the reasons for its use is not well understood. Much of the existing theoretical literature on trade credit has focused on explaining its use in developed economies, such as that of the United States. The research question has been to explain why it is efficient for non financial corporations in a well developed market system to act as financial intermediaries and advance credit when there exists a financial sector that already specializes in the provision of capital.

Firms as Financial Intermediaries: Evidence from Trade Credit Data