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on Corporate Finance |
| By: | Marc Auboin; Eddy Bekkers; Dario De Quarti |
| Abstract: | In this paper we integrate the costs of trade finance in a computable general equilibrium (CGE) model to evaluate the trade and output effects of counterfactual policy experiments on costs of and access to trade finance. The costs of financing international trade consist of two components: the financial costs and the costs associated with the risk of goods not being delivered, considering risk aversion of traders. These costs are determined for four ways to finance international trade (cash-in-advance, trade loans, letters of credit, and exports financed with internal working capital). Trade finance costs are a weighted average of the costs under the four different ways of financing. The framework is applied to trade of four ECOWAS countries employing data collected on financial costs, costs of risk and trade finance instrument shares through a comprehensive bank survey in these countries complemented with data from the literature. Counterfactual experiments on increases in the availability of letters of credit and trade loans and the costs of these instruments show that raising the shares and costs to African averages would increase trade of the four ECOWAS countries by about 11%. The framework is generic and can be applied to other countries. |
| Keywords: | trade credit, international trade, financial institutions, general equilibrium simulations |
| JEL: | F10 F14 F39 G21 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10445&r=cfn |
| By: | Felipe Benguria; Alvaro Garcia-Marin; Tim Schmidt-Eisenlohr |
| Abstract: | Most domestic and international firm-to-firm transactions rely on trade credit, where sellers grant buyers time to pay the invoice after delivery. Exploiting Chilean and Colombian transaction-level trade data, this paper documents new facts about trade credit use: trade credit use increases with firm-to-firm relationship length, an effect that is stronger for destination (source) countries with weaker (stronger) contract enforcement and for trade in differentiated goods. The paper develops a model featuring enforcement frictions, learning, and a financing cost advantage of trade credit that can rationalize these patterns. Initially, as there is uncertainty about the reliability of the trading partner, payment risk is a key factor limiting the use of trade credit. Through learning, this uncertainty resolves within a relationship over time. For older relationships, the payment choice is, therefore, only determined by the financing cost advantage of trade credit, and all relationships rely on trade credit in the long run. The paper thereby suggests a new benefit of long-term trade relationships: the ability to save on financing costs through the use of trade credit. |
| Keywords: | trade credit, relationships, learning, financing costs, risk |
| JEL: | F12 F14 G21 G32 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10465&r=cfn |
| By: | Yang Liu |
| Abstract: | Recent literature has shown that corporate indebtedness affects firm-level investment behavior but not necessarily aggregate business cycles. I argue that interactions among heterogeneous firms play an important role in equilibrium. After a downturn, financially unconstrained firms in financially constrained industries significantly increase capital ex-penditure to substitute depressed investment by their financially constrained competitors. The increase in investment, primarily driven by small and medium firms, leads to substantial gains in future sales. Using a new empirical approach, I further show that equilibrium effects are unambiguously countercyclical because the increase in investment by unconstrained firms does not crowd out investment by financially constrained competitors. The “competitive interaction channel” underscored in this paper may play an important role in mitigating the impact of negative shocks in macroeconomic models with financial heterogeneity. |
| Keywords: | Financial constraints; investment; equilibrium effects; imperfect competition; firm interaction; investment behavior; equilibrium effect; interaction channel; product similarity; Government debt management; Productivity; Capital spending; Commodity markets; Competition; North America |
| Date: | 2023–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/110&r=cfn |
| By: | Kosekova, Kamelia; Maddaloni, Angela; Papoutsi, Melina; Schivardi, Fabiano |
| Abstract: | We document the structure of firm-bank relationships across eleven euro area coun-tries and present new stylised facts using data from the Eurosystem credit registry -AnaCredit. We look at the number of banking relationships, reliance on the main bank, credit instruments, loan maturity, and interest rates. Firms in Southern Europe borrow from more banks and obtain a lower share of credit from the main bank than those in Northern Europe. They also tend to borrow more on short term, more expensive instru-ments and to obtain loans with shorter maturity. This is consistent with the hypothesis that firms in Southern Europe rely less on relationship banking and obtain credit less conducive to firm growth, in line with their smaller average size. Relationship lending does not translate in lower rates, possibly because banks appropriate part of the surplus generated by relationship lending through higher rates. JEL Classification: G21, G3, G32 |
| Keywords: | AnaCredit, bank credit, corporate financing, firm-bank relationship |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232826&r=cfn |