Monday, October 26, 2015 | 2:00pm-3:30pm | Room 335, HSBC Business School Building

Abstract

This paper investigates how macroeconomic monetary shocks and microeconomic financial distress factors affect the behavior of trade credit channel in debt market. There is a general notion that trade credit is considerably more expensive than bank lending as trade credit is preferred by credit-constrained borrowing firms. In corporate debt market, it is prevailing wisdom that the reliance on trade credit channel increases with the degree of credit rationing on financially constrained firms. This paper examines whether bank lending and trade credit lending channels are substitutes or complements at the time of credit constraints and provides finding that both bank lending and trade credit channels are pro-cyclical in response to macroeconomic shocks. Further, this paper provides the evidence that borrowing firms under firm-level financial distresses are inclined to increase the reliance on trade credit channel in short-term debt financing, supporting the substitutability of the trade credit channel to other lending channels, mainly, bank lending channel, in response to microeconomic financial distress factors.