Structural break between small and large firms' behaviour in trade credit and bank credit: evidence from India's retail sector

Abstract

This article recognizes the simultaneity of firms' decision in choosing between the various options of external financing. Additionally, the analysis allows the combination of bank finance and trade credit finance to vary with the firm's size even when all the firms are operating within the same financial infrastructure. We use cross-sectional data for the retail sector in India and apply structural break analysis common to time-series analysis to a system of simultaneous equations to split the sample into small and large firms. We find that the smaller firms depend more strongly on trade credit than the larger firms. Bank credit is found to be strongly related with the proxy for available collateral for the small firms but not for the large firms indicating that the large firms are unconstrained with respect to bank credit.

Keywords:

• firm size
• credit constraints
• bank credit
• trade credit
• structural break

JEL Classification:

• O16
• G21
• D22

Notes

¹ Trade credit and bank credit together comprise 85.52% of all external borrowing in this sample.

² Only 16.12% of this retail sample reported fixed asset purchases last year, such as machinery, vehicles, equipment, land and buildings, with machinery and equipment being very small shares of this investment.

³ Please refer Petersen and Rajan (1997) for a summary of theories of trade credit.

⁴ The partitioning of the sample is based on the Qu and Perron (2007) (Q–P) structural break estimation presented in Table 2.

Table 1. Summary statistics

Table 2. Qu and Perron (2007) (Q–P) test for a structural change in a system of equations