Trade Credit: Theories and Evidence

Mitchell A. Petersen, Raghuram G. Rajan

NBER Working Paper No. 5602
Issued in June 1996
NBER Program(s):Corporate Finance

In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short term trade credit may be routinely used to minimize transactions costs, medium term borrowing against trade credit is a form of financing of last resort. Suppliers lend to firms no one else lends to because they may have a comparative advantage in getting information about buyers cheaply, they have a better ability to liquidate goods, and they have a greater implicit equity stake in the firm's long term survival. We find some evidence consistent with the use of trade credit as a means of price discrimination. Finally, we find that firms with better access to credit from financial institutions offer more trade credit. This suggests that firms may intermediate between institutional creditors and other firms who have limited access to financial institutions.

download in pdf format
   (1837 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5602

Published: Review of Financial Studies, Vol. 10, no. 3 (1997): 661-691. citation courtesy of

Users who downloaded this paper also downloaded* these:
Fisman and Love w8960 Trade Credit, Financial Intermediary Development and Industry Growth
Blinder and Maccini w3408 The Resurgence of Inventory Research: What Have We Learned?
Klapper, Laeven, and Rajan w17146 Trade Credit Contracts
Petersen and Rajan w4921 The Effect of Credit Market Competition on Lending Relationships
Rajan and Zingales w5758 Financial Dependence and Growth
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us