Trade credit and bank relationships: evidence from pre-World War I Belgium

Abstract

We investigate the determinants of trade credit granted by suppliers in a historical environment which was characterized by high-information asymmetries and strong banks, focusing on the role of bank–firm relationships. Our results, which are based on a unique sample of 535 firm-year observations for 125 listed Belgian firms in four dominant industries in the period 1905 to 1909, are generally consistent with the financing role of trade credit. They suggest that trade credit was a tool for channelling funds from firms with close bank ties to other firms, which is consistent with findings for contemporary developing countries.

Notes

¹ Accounts receivable are scaled by total assets instead of sales because the financial statements generally did not show sales. We do not consider accounts payable because financial statements in pre-World War I Belgium did not distinguish between trade liabilities and bank debt.

² The limited number of bank equity stakes is remarkable, as studies on the history of Belgian universal banks tend to stress the role of these banks as equity investors (see e.g. Kurgan-Van Hentenryk, 1991). However, this finding is consistent with the conclusion of Fohlin (2006) that German banks in the late nineteenth century owned few equity stakes in nonfinancial companies.

³ To check the accuracy of the ‘Recueil Financier’, we compared the information in the ‘Receuil Financier’ with the entries in the appendices of the Official Gazette for a sub-sample of firms, but we found no differences.

⁴ We cannot rule out the possibility that some of these directors were, in fact, industrialists sitting on the board of a bank, and not bankers on the board of industrial firms. However, anecdotal evidence suggests that these directors generally were representing the interests of the bank. For example, Edouard Despret, who died in October 1906, held board positions in 19 different firms at the time of his death. He was the Vice-President of the Société Générale, which was by far the largest bank in Belgium. In November 1906, he was succeeded on the board of the Société Générale by Jean Jadot. Before becoming a Director of the Société Générale, Jean Jadot held no board positions at all. Three years later, he was a director of 13 different firms. In most of these firms, Edouard Despret had been a director when he died (Sources: the 1906 annual report of the Société Générale and the 1906 and 1910 editions of the Receuil Financier). All the firms in which Edouard Despret held positions before his death still had one or two Société Générale Directors in 1909.