Does Trade Credit Provides Favorable Information to Banks? Evidence from Japan

This paper examines whether trade credit as a credible signal about firm's creditworthiness tobanks facilitates provision of bank credit to the firms receiving trade credit. Using data onJapanese manufacturing firms over the period 1990-1995, we find that firms receiving tradecredit are provided short-term credit by less-informed banks. Consequently, in the firms thathave arm's-length relations with banks, trade credit plays an important role in mitigatingasymmetric information problems between firms and banks, thereby facilitating extension ofbank credit.