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Trade Credit, Financing Structure and Growth Junjie Xia Department of Economics University of Southern California Job Market Paper Jan. 12, 2017 Junjie Xia (USC-Economics) Trade Credit Job Market Paper 1 / 32 Outline Introduction

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Trade Credit, Financing Structure and Growth

Junjie Xia

Department of Economics University of Southern California

Job Market Paper

  • Jan. 12, 2017

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Outline

Introduction Empirical Evidence Model Quantitative Analysis Conclusion

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What I do

Empirical Evidence

◮ Firms who relied more on trade credit grew faster before the 2007-08

financial crisis, but experienced a sharper decline after the crisis

◮ Sales growth became less responsive to the dependence of bank

credit

Theoretical Framework

◮ Two types of collateral constraints - bank credit and trade credit ◮ Trade credit could amplify underlying shocks

Quantitative Analysis

◮ Simulate similar results as empirical findings ◮ Counterfactual exercises Junjie Xia (USC-Economics) Trade Credit Job Market Paper 3 / 32

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Literature Review

Empirical Studies

◮ Trade credit and growth

Petersen and Rajan (1997); Fishman and Love (2003); Allen, Qian and Qian (2005); Coulibaly, Cull, Xu, and Zhu (2009); Saprize and Zlate (2012); Li, Lu, Ng, and Yang (2015).

◮ Trade finance and the great trade collapse

Amiti and Weinstein (2011); Yang (2011); Chor and Manova (2012); Feenstra, Li and Lu (2014); Paravisini, Rappoport, Schuabl and Wolfenzon (2014); Auboin (2015)

◮ Domestic Distortions

Chen, Tian and Yu (2016); Drozd, Giri and Xia (2016); Wu and Xia (2016);

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Literature Review

Theoretical Studies

◮ Trade Credit

Petersen and Rajan (1997); Burkart and Ellingsen (2004); Klapper, Laeven and Rajan (2012); Olsen (2013); Ahn (2015); Antr` as and Foley (2015).

◮ Financial Friction

Kiyotaki and Moore (1997); Jermann and Quadrini (2012); Cooley, Marimon, and Quadrini (2004, 2014); Bigio and La’O (2016);

◮ Dual-conllateral-constraints

Rampini and Viswanathan (2015)

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Data

Annual Surveys of Manufacturing Enterprises by the NBSC

◮ annual sales ≥ 500 RMB (about 70,000 USD in 2007) ◮ detailed firm-level information:

identification; operation; balance sheet

◮ cross-section data ◮ construct a panel (Brandt, Biesebroeck, and Zhang, 2012):

1.7 millions observations; 51,743 permanent firms

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Empirical Motivation

Figure 1:

Sales Growth across Different Quintiles of the Use of External Finance

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Empirical Strategy

Difference-in-difference approach

◮ Post: = 1 if year = 2009 ◮ TCi: the mean of trade credit of firm i overtime ◮ BCi: the mean of bank credit of firm i overtime

(TCi,2004 and BCi,2004)

◮ Xi,t: trade credit, bank credit, age, size, employment, inventory ◮ δi: firm fixed effect

Focus on β4 and β5

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Empirical Results

Baseline regressions for permanent exporters

Robustness Checks (Placebo; IV; Time trend; Size)

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Empirical Results

Non-exporting V.S. Exporting; State-owned V.S. Private

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Evidence to Theory

Three stylized facts

◮ Firms with higher leverage on trade credit grow faster ◮ Firms that made greater use of trade credit experience a sharper

decline in sales growth after the 2007-08 financial crisis. The relevancy of bank credit during the financial crisis instead is not significant.

◮ The magnitude of the impact of the financial crisis on growth

increases with exporting intensity

A simple two-period model

◮ Two types of financial contracts - bank credit and trade credit ◮ Trade credit - capital and sales as collateral ◮ Nash bargaining Junjie Xia (USC-Economics) Trade Credit Job Market Paper 11 / 32

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The Model

Three types of agents (Rampini and Viswanathan (2015))

◮ The bank: βb; deep-pockets; R′ =

1 βb

◮ The supplier: βs; intermediate goods producer x = g(ks)

initial wealth ws; pays dividends ds and d′

s

borrows from the bank b′

s at R′;

◮ The exporter: βe; final goods producer y′ = A′f(ke, x)

initial wealth we; pays dividends de and d′

e

borrowing from the bank b′

e at R′; and from the supplier b′ x at R′ e

Assumption 1: βe < βs < βb Trade credit: R′

e(1 − α)x with R′ e > R′

Two financial contracts - bank credit and trade credit

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Timing

Figure 2: The Exporter’s Timing

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Financial Contracts

A bank credit financial contract between an agent {is, ie} and a bank consists of lending {b′

s, b′ e} and the interest rate {R′}, and

satisfies the condition on collateral constraints. ξb(1 − δ)ks ≥ R′b′

s

  • r

ξb(1 − δ)ke ≥ R′b′

e

A trade credit financial contract between an exporter and a supplier consists of downpayment {αx}, lending {b′

x} and interest

rate {R′

e}, and satisfies the condition on the collateral constraint.

(ξs − ξb)(1 − δ)ke + φsAf(ks, x) ≥ R′

e(1 − α)x,

ξs > ξb

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Agents’ Problem

The resale ability on sales position

Case 1: (ξs − ξ)(1 − δ)ke ≥ R′

ebx

Case 2: (ξs − ξ)(1 − δ)ke + φsAf(ke, x) ≥ R′

ebx

Production: x = αkθ

s and f(ke, x) = (kθ e)γx1−γ;

Resale ability: φs = ξs − ξ; No depreciation: δ = 0 Nash bargaining - α and R′

e

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Nash Bargaining

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Solution

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Discussion

Initial wealth (i) ∂α∗

∂we > 0 and ∂α∗ ∂ws < 0,

(ii) ∂R′∗

e

∂we > 0 and ∂R′∗

e

∂ws < 0.

Impact of the current shock on output ∂y′∗

∂A > 0.

input-output structure y′∗ = A(kθ∗

e )γ(kθ∗ s )1−γ = A

γΩ 1 − γ θγx∗.

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Parameterization

Cobb-Douglas factors shares - literature

◮ θ = 0.5 - Brandt, Hsieh, and Zhu (2008) ◮ γ = 0.32 - Charles Jones (2011)

Discount factors - data

◮ βb = 0.9776, βs = 0.9726, βe = 0.9676 and δ = 1.4%

Resale ability - data and borrowing constraints

◮ ξ = 0.7666 and ξs = 0.8288

Resale ability - data and borrowing constraints

◮ ξ = 0.7666 and ξs = 0.8288

Bargaining power - model solution and data

◮ η = 1

2

The productivity shock - production function

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Sales growth

Model V.S. Data

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Trade Credit

Sales growth across different quintiles of trade credit

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Simulation I

Matching the empirical finding

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Simulation II

Changing the exporter’s initial wealth

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Simulation III

Changing the supplier’s resale ability

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Counterfactual I

Sales cannot used as collateral

Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 25 / 32

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Counterfactual II

A frictionless economy

Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 26 / 32

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Counterfactual III

A more developed financial market

Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 27 / 32

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Conclusion

Document new empirical evidence

◮ firms made more use of trade credit experience sharper decline on

sales growth during the 2007-08 financial crisis

◮ the dependence of bank credit seems to be irrelevant

A dual-collateral-constraint model

◮ Trade credit is more vulnerable than bank credit ◮ Trade credit amplifies the impact of underlying shocks

Policy implications

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Counterfactual I

Sales cannot be used as collateral

Back ◮ Collateral constraint on trade credit: (ξs − ξ)ˆ

ke ≥ R′

e(1 − α)ˆ

kθ

s

Solution

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Counterfactual III

A more developed financial market

Back ◮ Collateral constraints on bank credit and trade credit

Solution

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The Case of U.S.

U.S. manufacturing firms (Computstat)

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Measuring trade credit in 2006

Sales growth across different quintiles of trade credit

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