discrimination but also as an indirect tool (if all buyers are offered the same terms) in favor of borrowers with a low credit standing.

www.fuguangzhuzao.com Trade credits are also used to develop long term relationships between the supplier and the buyers. This often manifests itself by the supplier extending the credit period in case the buyer has temporary financial difficulties. Compared to financial institutions suppliers have better knowledge of the industry and are therefore better able to judge whether the firm has temporary problems or the problems are of a more permanent nature.

The last motive in not strictly a strategic motive but is based on transactions costs. Trade credits are an efficient way of performing the transactions since it is possible to separate between delivery and payment. In basic terms the truck driver delivering the goods does not have to run around to find the person responsible for paying the bills. The buyer also saves transactions costs by reducing the amount of cash required on“hand” .

Financing motives

The basis for this view is that firms compete with financial institutions in offering credit to other firms. The traditional view of financial institutions is that they extend credit to firms where asymmetric information is a major problem. Financial institutions have advantages in collecting and analyzing information from, in particular, smaller and medium sized firms that suffer from problems of asymmetric information. The key to this advantage over financial markets lies in the close relationship between the bank and the firm and in the payment function. The financial institution is able to monitor the cash inflow and outflows of the firm by monitoring the accounts of the firm.

But with trade credits non-financial firms are competing with financial institutions in solving these problems and extending credit. How can non-financial institutions compete in this market? Petersen and Rajan [1997] briefly discusses several ways that suppliers may have advantages over financial institutions. The supplier has a close working association with the borrower and more frequently visits the premises than a financial institution does. The size and timing of the lenders

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orders with the supplier provides information about the conditions of the borrowers business. Notice that this information is available to the supplier before it is available to the financial institution since the financial institution has to wait for the cash flow associated with the orders. The use of early payment discounts provides the supplier with an indication of problems with creditworthiness in the firm. Again the supplier obtains the information before the financial institution does. Thus the supplier may be able to obtain information about the creditworthiness faster and cheaper than the financial institution.

The supplier may also have advantages in collecting payments. If the supplier has at least a local monopoly for the goods then the ability to withhold future deliveries is a powerful incentive for the firm to pay. This is a particular powerful threat if the borrower only accounts for a small fraction of the suppliers business. In case of defaults the supplier can seize the goods and in general has a better use for them than a financial intermediary sizing the same goods. Through its sales network the supplier can sell the reclaimed goods faster and at a higher price than what is available to a financial intermediary. These advantages, of course, depend on the durability of the goods and how much the borrower has transformed them.

If asymmetric information is one of the driving forces the explanation of trade credits then firms can use the fact that their suppliers have issued them credits in order to obtain additional credit from the banks. The banks are aware that the supplier has better information thus the bank can use trade credits as signal of the credit worthiness of the firm.

That trade credits are in general secured by the goods delivered also puts a limit on the amount of trade credits the firm can obtain, thus the firm cannot use trade credits to finance the entire operations of the firm.

In summary the prediction is that the level of asymmetric information is relatively low between the providers of trade credit and the borrowers due to the issuer’s general knowledge of the firm and the industry. In the empirical work below the variables explaining the use of trade credit are credit risk factors and Cost of Goods Sold. Since these trade credits are secured by the materials delivered to the

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firm, firms cannot “borrow” for more than the delivery value of the goods and services.

2.2 Bank loans

Banks have less information than providers of trade credit and the costs of gathering information are also higher for banks than for providers of trade credit. Providers of trade credits also have an advantage over banks in selling the collateral they have themselves delivered, but due to their size and number of transactions banks have an advantage in selling general collateral such as buildings, machinery etc. Banks therefore prefer to issue loans using tangible assets as collateral, also due to asymmetric information, they are less likely to issue loans to more opaque firms such as small and high growth firms. Banks are therefore willing to lend long term provided that tangible assets are available for collateral. In the empirical work below tangible assets and credit risk variables are expected to explain the use of long-term bank loans and the amount of long-term bank loans are limited by the value of tangible assets.

The basis for issuing Short Term Bank Loans is the comparative advantages banks have in evaluating and collecting on accounts receivables, i.e. Debtors. It is also possible to use Cash and Cash equivalents as collateral but banks do not have any comparative advantages over other providers of credit in terms of evaluating and collecting these since they consist of cash and marketable securities. In terms of inventories, again banks do not have any comparative advantages in evaluating these. Thus, we expect the amounts of debtors to be the key variable in explaining the behaviour of Short Term Bank Loans.

2.3. Expensive trade credit and other loans

After other sources of finance have been exhausted firms can delay payment on their trade credits. However, this is expensive since it involves giving up the discount and maybe incurs penalty payments. Also the use of this type of credit can have reputational costs and it may be difficult to obtain trade credit in the future. The nature of the costs, of course, depends on the number of suppliers, if there is only one supplier then these costs can be rather high whereas if the firm can obtain the same

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goods and services from other suppliers then these costs are not particularly high.

Other debt is composed of credit card debt, car loans etc. that are dearer than bank loans. Again, the variables determining this type of debt are financial health and performance. Below, however, we do not have any good information regarding these types of loans and what they consists of thus we pay little attention to them in the empirical work.

Conclusions

Currently there exist two theories of capital structure The Pecking Order Theory where firms first exhaust all funding of the cheapest source first, then the second cheapest source and so on. The differences in funding costs are due to adverse selection costs from asymmetric information. The second theory is the Tradeoff Theory where firms increase the amount of debt as long as the benefits are greater than the costs from doing so. The benefits of debt are tax-shields and “positive agency costs” and the costs of debt are the expected bankruptcy costs and the “negative agency costs”. In both of these theories, the composition of the asset side of the balance sheet is not important and in this paper, that proposition is strongly rejected. So the main conclusion is that the composition of the asset side of the balance sheet influences the composition of the liability side of the balance sheet in terms of the different types of debt used to finance the firm, or that the use of the funds is important in deciding the type of financing available.

We further argue that it is asymmetric information and collateral that determines the relationship between the asset side and liability side of the balance sheet. The theory works reasonable well for Cheap Trade Credits and Long Term Bank Loans but the tests for Short Term Bank Loans are disappointing.

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