We received helpful suggestions from Douglas Baird, Leslie Hannah, Hidehiko Ichimura, Ronald Mann, Edward Morrison, Hiroshi Ohashi, Eric Rasmusen, Elizabeth Warren, two anonymous referees, and workshop participants at Harvard University, and generous financial assistance from the Center for International Research on the Japanese Economy at the University of Tokyo and the John M. Olin Center for Law, Economics & Business at Harvard University.
The Implications of Trade Credit for Bank Monitoring: Suggestive Evidence from Japan
Article first published online: 1 MAY 2008
© 2008, The Author(s) Journal Compilation © 2008 Blackwell Publishing
Journal of Economics & Management Strategy
Volume 17, Issue 2, pages 317–343, Summer 2008
How to Cite
Miwa, Y. and Ramseyer, J. M. (2008), The Implications of Trade Credit for Bank Monitoring: Suggestive Evidence from Japan. Journal of Economics & Management Strategy, 17: 317–343. doi: 10.1111/j.1530-9134.2008.00180.x
- Issue published online: 1 MAY 2008
- Article first published online: 1 MAY 2008
Firms in modern developed economies borrow from both banks and trade partners. Using Japanese manufacturing data from the 1960s, we estimate the price of trade credit, and explore some of the ways firms choose between the credit and bank loans. We find that firms of all sizes borrow heavily from their trade partners, and at implicit rates that track the explicit rates banks would charge. They borrow from banks when they anticipate needing money for relatively long periods; they turn to trade partners when they face short-term unexpected exigencies. This apparent contrast in the term structures follows, we suggest, from the fundamentally different way bankers and trade partners cut default risk. Because bankers seldom know their borrowers' industries first hand, they rely on formal legal protection (like security interests). Because trade partners know the industry well, they reduce risk by monitoring their borrowers closely instead. Because the costs to creating legal mechanisms are heavily front-loaded, bankers focus on long-term debt; because the costs of monitoring debtors are ongoing, trade creditors do not. Apparently, banks monitor less than we have thought.