Credit rationing and signalling effects of trade credit: Theory and evidence from korean firms

We examine interaction among bank credit, trade credit and internal wealth. Our theoretical model derives borrowers’ optimal patterns of credit uses depending on internal wealth levels, subject to credit rationing. In particular, the model incorporates signalling effects of and nonlinear interest schedules for trade credit to account for stylized facts from Korean data that are at odds with previous models. Our empirical results are broadly consistent with presence of signalling effects as well as theoretically predicted interaction patterns. The results could be interpreted as a rough estimate of the extent of credit rationing among sample firms.