Trade Credit, Financing Structure and Growth Junjie Xia Department of Economics University of Southern California Job Market Paper Jan. 12, 2017 Junjie Xia (USC-Economics) Trade Credit Job Market Paper 1 / 32
Outline Introduction Empirical Evidence Model Quantitative Analysis Conclusion Junjie Xia (USC-Economics) Trade Credit Job Market Paper 2 / 32
What I do Empirical Evidence Firms who relied more on trade credit grew faster before the 2007-08 financial crisis, but experienced a sharper decline after the crisis Sales growth became less responsive to the dependence of bank credit Theoretical Framework Two types of collateral constraints - bank credit and trade credit Trade credit could amplify underlying shocks Quantitative Analysis Simulate similar results as empirical findings Counterfactual exercises Junjie Xia (USC-Economics) Trade Credit Job Market Paper 3 / 32
Literature Review Empirical Studies Trade credit and growth Petersen and Rajan (1997); Fishman and Love (2003); Allen, Qian and Qian (2005); Coulibaly, Cull, Xu, and Zhu (2009); Saprize and Zlate (2012); Li, Lu, Ng, and Yang (2015). Trade finance and the great trade collapse Amiti and Weinstein (2011); Yang (2011); Chor and Manova (2012); Feenstra, Li and Lu (2014); Paravisini, Rappoport, Schuabl and Wolfenzon (2014); Auboin (2015) Domestic Distortions Chen, Tian and Yu (2016); Drozd, Giri and Xia (2016); Wu and Xia (2016); Junjie Xia (USC-Economics) Trade Credit Job Market Paper 4 / 32
Literature Review Theoretical Studies Trade Credit Petersen and Rajan (1997); Burkart and Ellingsen (2004); Klapper, Laeven and Rajan (2012); Olsen (2013); Ahn (2015); Antràs and Foley (2015). Financial Friction Kiyotaki and Moore (1997); Jermann and Quadrini (2012); Cooley, Marimon, and Quadrini (2004, 2014); Bigio and La O (2016); Dual-conllateral-constraints Rampini and Viswanathan (2015) Junjie Xia (USC-Economics) Trade Credit Job Market Paper 5 / 32
Data Annual Surveys of Manufacturing Enterprises by the NBSC annual sales 500 RMB (about 70,000 USD in 2007) detailed firm-level information: identification; operation; balance sheet cross-section data construct a panel (Brandt, Biesebroeck, and Zhang, 2012): 1.7 millions observations; 51,743 permanent firms Junjie Xia (USC-Economics) Trade Credit Job Market Paper 6 / 32
Empirical Motivation Figure 1: Sales Growth across Different Quintiles of the Use of External Finance Junjie Xia (USC-Economics) Trade Credit Job Market Paper 7 / 32
Empirical Strategy Difference-in-difference approach Post: = 1 if year = 2009 T Ci : the mean of trade credit of firm i overtime BC i : the mean of bank credit of firm i overtime (T C i,2004 and BC i,2004 ) X i,t : trade credit, bank credit, age, size, employment, inventory δi : firm fixed effect Focus on β 4 and β 5 Junjie Xia (USC-Economics) Trade Credit Job Market Paper 8 / 32
Empirical Results Baseline regressions for permanent exporters Robustness Checks (Placebo; IV; Time trend; Size) Junjie Xia (USC-Economics) Trade Credit Job Market Paper 9 / 32
Empirical Results Non-exporting V.S. Exporting; State-owned V.S. Private Junjie Xia (USC-Economics) Trade Credit Job Market Paper 10 / 32
Evidence to Theory Three stylized facts Firms with higher leverage on trade credit grow faster Firms that made greater use of trade credit experience a sharper decline in sales growth after the 2007-08 financial crisis. The relevancy of bank credit during the financial crisis instead is not significant. The magnitude of the impact of the financial crisis on growth increases with exporting intensity A simple two-period model Two types of financial contracts - bank credit and trade credit Trade credit - capital and sales as collateral Nash bargaining Junjie Xia (USC-Economics) Trade Credit Job Market Paper 11 / 32
The Model Three types of agents (Rampini and Viswanathan (2015)) The bank: β b ; deep-pockets; R = 1 β b The supplier: β s ; intermediate goods producer x = g(k s ) initial wealth w s ; pays dividends d s and d s borrows from the bank b s at R ; The exporter: βe ; final goods producer y = A f(k e, x) initial wealth w e ; pays dividends d e and d e borrowing from the bank b e at R ; and from the supplier b x at R e Assumption 1: β e < β s < β b Trade credit: R e(1 α)x with R e > R Two financial contracts - bank credit and trade credit Junjie Xia (USC-Economics) Trade Credit Job Market Paper 12 / 32
Timing Figure 2: The Exporter s Timing Junjie Xia (USC-Economics) Trade Credit Job Market Paper 13 / 32
Financial Contracts A bank credit financial contract between an agent {i s, i e } and a bank consists of lending {b s, b e} and the interest rate {R }, and satisfies the condition on collateral constraints. ξ b (1 δ)k s R b s or ξ b (1 δ)k e R b e A trade credit financial contract between an exporter and a supplier consists of downpayment {αx}, lending {b x} and interest rate {R e}, and satisfies the condition on the collateral constraint. (ξ s ξ b )(1 δ)k e + φ s Af(k s, x) R e(1 α)x, ξ s > ξ b Junjie Xia (USC-Economics) Trade Credit Job Market Paper 14 / 32
Agents Problem The resale ability on sales position Case 1: (ξ s ξ)(1 δ)k e R eb x Case 2: (ξ s ξ)(1 δ)k e + φ s Af(k e, x) R eb x Production: x = αk θ s and f(k e, x) = (k θ e) γ x 1 γ ; Resale ability: φ s = ξ s ξ; No depreciation: δ = 0 Nash bargaining - α and R e Junjie Xia (USC-Economics) Trade Credit Job Market Paper 15 / 32
Nash Bargaining Junjie Xia (USC-Economics) Trade Credit Job Market Paper 16 / 32
Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 17 / 32
Discussion Initial wealth (i) α w e > 0 and α w s < 0, (ii) R e w e > 0 and R e w s < 0. Impact of the current shock on output y A > 0. input-output structure y = A(ke θ ) γ (ks θ ) 1 γ = A ( γω ) θγx. 1 γ Junjie Xia (USC-Economics) Trade Credit Job Market Paper 18 / 32
Parameterization Cobb-Douglas factors shares - literature θ = 0.5 - Brandt, Hsieh, and Zhu (2008) γ = 0.32 - Charles Jones (2011) Discount factors - data βb = 0.9776, β s = 0.9726, β e = 0.9676 and δ = 1.4% Resale ability - data and borrowing constraints ξ = 0.7666 and ξs = 0.8288 Resale ability - data and borrowing constraints ξ = 0.7666 and ξs = 0.8288 Bargaining power - model solution and data η = 1 2 The productivity shock - production function Junjie Xia (USC-Economics) Trade Credit Job Market Paper 19 / 32
Sales growth Model V.S. Data Junjie Xia (USC-Economics) Trade Credit Job Market Paper 20 / 32
Trade Credit Sales growth across different quintiles of trade credit Junjie Xia (USC-Economics) Trade Credit Job Market Paper 21 / 32
Simulation I Matching the empirical finding Junjie Xia (USC-Economics) Trade Credit Job Market Paper 22 / 32
Simulation II Changing the exporter s initial wealth Junjie Xia (USC-Economics) Trade Credit Job Market Paper 23 / 32
Simulation III Changing the supplier s resale ability Junjie Xia (USC-Economics) Trade Credit Job Market Paper 24 / 32
Counterfactual I Sales cannot used as collateral Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 25 / 32
Counterfactual II A frictionless economy Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 26 / 32
Counterfactual III A more developed financial market Model Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 27 / 32
Conclusion Document new empirical evidence firms made more use of trade credit experience sharper decline on sales growth during the 2007-08 financial crisis the dependence of bank credit seems to be irrelevant A dual-collateral-constraint model Trade credit is more vulnerable than bank credit Trade credit amplifies the impact of underlying shocks Policy implications Junjie Xia (USC-Economics) Trade Credit Job Market Paper 28 / 32
Counterfactual I Sales cannot be used as collateral Back Collateral constraint on trade credit: (ξ s ξ)ˆk e R e(1 α)ˆk s θ Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 29 / 32
Counterfactual III A more developed financial market Back Collateral constraints on bank credit and trade credit Solution Junjie Xia (USC-Economics) Trade Credit Job Market Paper 30 / 32
The Case of U.S. U.S. manufacturing firms (Computstat) Back Junjie Xia (USC-Economics) Trade Credit Job Market Paper 31 / 32
Measuring trade credit in 2006 Sales growth across different quintiles of trade credit Back Junjie Xia (USC-Economics) Trade Credit Job Market Paper 32 / 32