In accordance with the Memorandum of Understanding signed between the BIFELAB and the Essex Finance Center (EFIC), the respective members, Professor Michele Modina and Professor Stefano Filomeni agreed to carry out a joint research project titled “Net Trade Credit and Investments: A Relationship Lending Perspective”.
This research project aims to further contribute to the current literature by investigating the extent to which trade credit has real effects on the economy. The project does so by examining the net effect of extended and received trade credit, i.e., net trade credit, on the growth rate of firm investment by using a panel dataset comprising approximately 20.000 SMEs operating in Italy with 99 cooperative banks in the time period 2008-2014. That is, the study investigates the real effects on firm long-term investments of the trade credit channel, reflected in strong relationships between customers and suppliers; indeed, as the latter are typically rolled over under normal conditions, trade credit may provide the necessary funding for undertaking long-term investment projects. The analysis focuses on small and medium-sized firms who typically do not have access to general purpose long-term debt as they are less transparent than their larger corporate counterparts and poses a higher credit risk (Carey et al., 1993; Berger and Udell, 1998). The SME corporate segment is thus a perfect setting for the analysis, since, for this segment, trade credit represents the only major alternative source of financing (Berger and Udell, 1998). Therefore, we investigate this nexus by focusing on the most credit constrained and vulnerable firms in the market, i.e., SMEs, for which
the trade credit channel forms a substantial part of their balance sheet.
