By exploiting a unique and proprietary panel dataset comprising 6,480 Italian SMEs having a relationship with 99 cooperative banks over the period 2008-2014, we investigate the influence of the trade credit channel on firm investment decisions in the Italian market, distinguished by a considerable presence of relationship cooperative banks’ branches with a heterogeneous geographical distribution. Firstly, our findings confirm a significant influence of the trade credit channel on firm investment decisions. Secondly, we document that those SMEs located in those Italian provinces with an abundance of cooperative banks’ branches rely less on trade credit to finance investments. Lastly, we show that longer firm-bank relationships decrease firm dependence on trade credit to boost investments. Our study is of particular relevance because it strengthens the effectiveness of the trade credit channel for SMEs in spurring corporate investments. Indeed, fostering a deep understanding of the real effects of firm financing sources is paramount to encourage investment by SMEs and to allow them to preserve their positioning in the market. Moreover, we exploit the Italian market, well-suited to perform such an analysis, since it is characterized by more inter-personal financing relationships as compared to other countries.
Keywords: SMEs, trade credit, investment, relationship lending, soft information, cooperative bank