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 Empirical Evidence Model Quantitative Analysis Conclusion Junjie Xia (USC-Economics) Trade Credit Job Market Paper 2 / 32
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
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); Junjie Xia (USC-Economics) Trade Credit Job Market Paper 4 / 32
Literature Review Theoretical Studies ◮ Trade Credit Petersen and Rajan (1997); Burkart and Ellingsen (2004); Klapper, Laeven and Rajan (2012); Olsen (2013); Ahn (2015); Antr` a s 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) Junjie Xia (USC-Economics) Trade Credit Job Market Paper 5 / 32
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 Junjie Xia (USC-Economics) Trade Credit Job Market Paper 6 / 32
Empirical Motivation Figure 1: Sales Growth across Different Quintiles of the Use of External Finance Junjie Xia (USC-Economics) Trade Credit Job Market Paper 7 / 32
Empirical Strategy Difference-in-difference approach ◮ Post : = 1 if year = 2009 ◮ TC i : the mean of trade credit of firm i overtime ◮ BC i : the mean of bank credit of firm i overtime ( TC i, 2004 and BC i, 2004 ) ◮ X i,t : trade credit, bank credit, age, size, employment, inventory ◮ δ i : firm fixed effect Focus on β 4 and β 5 Junjie Xia (USC-Economics) Trade Credit Job Market Paper 8 / 32
Empirical Results Baseline regressions for permanent exporters Robustness Checks (Placebo; IV; Time trend; Size) Junjie Xia (USC-Economics) Trade Credit Job Market Paper 9 / 32
Empirical Results Non-exporting V.S. Exporting; State-owned V.S. Private Junjie Xia (USC-Economics) Trade Credit Job Market Paper 10 / 32
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
The Model Three types of agents (Rampini and Viswanathan (2015)) ◮ The bank : β b ; deep-pockets; R ′ = 1 β b ◮ The supplier : β s ; intermediate goods producer x = g ( k s ) initial wealth w s ; pays dividends d s and d ′ s borrows from the bank b ′ s at R ′ ; ◮ The exporter : β e ; final goods producer y ′ = A ′ f ( k e , x ) initial wealth w e ; pays dividends d e and d ′ e borrowing from the bank b ′ e at R ′ ; and from the supplier b ′ x at R ′ e Assumption 1: β e < β s < β b Trade credit: R ′ e (1 − α ) x with R ′ e > R ′ Two financial contracts - bank credit and trade credit Junjie Xia (USC-Economics) Trade Credit Job Market Paper 12 / 32
Timing Figure 2: The Exporter’s Timing Junjie Xia (USC-Economics) Trade Credit Job Market Paper 13 / 32
Financial Contracts A bank credit financial contract between an agent { i s , i e } and a bank consists of lending { b ′ s , b ′ e } and the interest rate { R ′ } , and satisfies the condition on collateral constraints. ξ b (1 − δ ) k s ≥ R ′ b ′ ξ b (1 − δ ) k e ≥ R ′ b ′ or s 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. ( ξ s − ξ b )(1 − δ ) k e + φ s Af ( k s , x ) ≥ R ′ e (1 − α ) x , ξ s > ξ b Junjie Xia (USC-Economics) Trade Credit Job Market Paper 14 / 32
Agents’ Problem The resale ability on sales position Case 1: ( ξ s − ξ )(1 − δ ) k e ≥ R ′ e b x Case 2: ( ξ s − ξ )(1 − δ ) k e + φ s Af ( k e , x ) ≥ R ′ e b x Production: x = αk θ s and f ( k e , x ) = ( k θ e ) γ x 1 − γ ; Resale ability: φ s = ξ s − ξ ; No depreciation: δ = 0 Nash bargaining - α and R ′ e Junjie Xia (USC-Economics) Trade Credit Job Market Paper 15 / 32
Nash Bargaining Junjie Xia (USC-Economics) Trade Credit Job Market Paper 16 / 32
Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 17 / 32
Discussion Initial wealth (i) ∂α ∗ ∂w e > 0 and ∂α ∗ ∂w s < 0, (ii) ∂R ′∗ ∂w e > 0 and ∂R ′∗ ∂w s < 0. e e Impact of the current shock on output ∂y ′∗ ∂A > 0. input-output structure � γ Ω y ′∗ = A ( k θ ∗ s ) 1 − γ = A � θγ x ∗ . e ) γ ( k θ ∗ 1 − γ Junjie Xia (USC-Economics) Trade Credit Job Market Paper 18 / 32
Parameterization Cobb-Douglas factors shares - literature ◮ θ = 0 . 5 - Brandt, Hsieh, and Zhu (2008) ◮ γ = 0 . 32 - Charles Jones (2011) Discount factors - data ◮ β b = 0 . 9776, β s = 0 . 9726, β e = 0 . 9676 and δ = 1 . 4% Resale ability - data and borrowing constraints ◮ ξ = 0 . 7666 and ξ s = 0 . 8288 Resale ability - data and borrowing constraints ◮ ξ = 0 . 7666 and ξ s = 0 . 8288 Bargaining power - model solution and data ◮ η = 1 2 The productivity shock - production function Junjie Xia (USC-Economics) Trade Credit Job Market Paper 19 / 32
Sales growth Model V.S. Data Junjie Xia (USC-Economics) Trade Credit Job Market Paper 20 / 32
Trade Credit Sales growth across different quintiles of trade credit Junjie Xia (USC-Economics) Trade Credit Job Market Paper 21 / 32
Simulation I Matching the empirical finding Junjie Xia (USC-Economics) Trade Credit Job Market Paper 22 / 32
Simulation II Changing the exporter’s initial wealth Junjie Xia (USC-Economics) Trade Credit Job Market Paper 23 / 32
Simulation III Changing the supplier’s resale ability Junjie Xia (USC-Economics) Trade Credit Job Market Paper 24 / 32
Counterfactual I Sales cannot used as collateral Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 25 / 32
Counterfactual II A frictionless economy Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 26 / 32
Counterfactual III A more developed financial market Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 27 / 32
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 Junjie Xia (USC-Economics) Trade Credit Job Market Paper 28 / 32
Counterfactual I Sales cannot be used as collateral Back ◮ Collateral constraint on trade credit: ( ξ s − ξ )ˆ e (1 − α )ˆ k θ k e ≥ R ′ s Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 29 / 32
Counterfactual III A more developed financial market Back ◮ Collateral constraints on bank credit and trade credit Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 30 / 32
The Case of U.S. U.S. manufacturing firms (Computstat) Back Junjie Xia (USC-Economics) Trade Credit Job Market Paper 31 / 32
Measuring trade credit in 2006 Sales growth across different quintiles of trade credit Back Junjie Xia (USC-Economics) Trade Credit Job Market Paper 32 / 32
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