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Do trade credit and bank credit complement or substitute each other in public and private firms?

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  • Afrifa, Godfred Adjapong
  • Tingbani, Ishmael
  • Alshehabi, Ahmad
  • Halabi, Hussein

Abstract

In this study, we analyse the complementary and substitution effect between trade credit (TC) and short-term bank credit (BC) for public and private firms in the UK. Using a sample of 254,352 firm-year observations over the period 2008–2021, we find TC and BC are substitutes for public firms that have easy access to cheap external finance. In contrast, TC and BC are complements for private firms that have limited access to alternative financing resources, such as financial markets. Importantly, our results show that public firms are faster in adjusting towards the optimum level of their TC and BC than private firms in an attempt to determine the appropriate mix between these two types of financing. Our study introduces new evidence on the efficient management of TC and BC for public and private firms.

Suggested Citation

  • Afrifa, Godfred Adjapong & Tingbani, Ishmael & Alshehabi, Ahmad & Halabi, Hussein, 2023. "Do trade credit and bank credit complement or substitute each other in public and private firms?," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 748-765.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:748-765
    DOI: 10.1016/j.iref.2023.07.017
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    References listed on IDEAS

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    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Xavier Freixas, 1993. "Short term credit versus account receivable financing," Economics Working Papers 27, Department of Economics and Business, Universitat Pompeu Fabra.
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    More about this item

    Keywords

    Trade credit; Short-term bank credit; Public firms; Private firms;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G01 - Financial Economics - - General - - - Financial Crises

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