Open AccessCREDIT QUALITY AND SUBSTITUTION IN SME FINANCE
Author(s) -
Lars Nordén,
Stefan van Kampen,
Manuel Illueca
Publication year - 2021
Publication title -
journal of financial management markets and institutions
Language(s) - English
Resource type - Journals
ISSN - 2282-717X
DOI - 10.1142/s2282717x21500055
Subject(s) - trade credit , financial crisis , credit crunch , credit history , bank credit , business , substitution effect , quality (philosophy) , monetary economics , financial system , finance , economics , macroeconomics , philosophy , neoclassical economics , epistemology
We investigate whether and how SMEs’ credit quality influences their substitution of bank credit for trade credit. Using data from the five largest European countries, we find that substitution of bank credit for trade credit decreases during the financial crisis, but it decreases significantly less for ex ante low credit quality firms. We control for pre-crisis or lagged firm characteristics including size and external finance dependence, industry effects, sample selection effects and cross-country heterogeneity. We also find that low credit quality firms increase their absolute and relative trade credit usage significantly more than high credit quality firms during the financial crisis. The effects are consistent across countries and stronger for net trade credit borrowers and financially constrained firms. The evidence highlights how credit quality influences demand-side driven substitution in SME finance.