Trade Credit, Financial Intermediary Development, and Industry Growth
Recent empirical work has shown that financial development is important for economic growth, since well-developed financial markets are more effective at allocating capital to firms with high-value projects. This raises the question of whether firm...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/10/1615097/trade-credit-financial-intermediary-development-industry-growth http://hdl.handle.net/10986/19512 |
| Summary: | Recent empirical work has shown that
financial development is important for economic growth,
since well-developed financial markets are more effective at
allocating capital to firms with high-value projects. This
raises the question of whether firms with high return
projects in countries with poorly developed financial
institutions, are able to draw on alternative sources of
capital, to offset the effects of deficient (formal)
financial intermediaries. Recent work suggests that implicit
borrowing, in the form of trade credit, may provide one such
source of funds. Using the methodology of Rajan and Zingales
(1998), the authors show that in countries with relatively
weak financial institutions, industries with greater
dependence on trade credit financing (measured by the ratio
of accounts payable to total assets) grow faster than
industries that rely less on such credit. Furthermore,
consistent with the notion that young firms may not use
trade credit, the authors show that most of the effect they
report, comes from growth in preexisting firms, rather than
from an increase in the number of firms. |
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