TAILIEUCHUNG - Credit channel, trade credit channel, and inventory investment: evidence from a panel of UK firms

Consumer access to credit, housing, insurance, basic utility services, and even employment is increasingly determined by centralized records of credit history and automated interpretations of those records. Credit histories in one form or another have long been an important factor in decisions to extend or deny credit to consumers 1 . Historically, such decisions required a skilled, human evaluation of the information in an applicant’ s credit history to determine the likelihood that the applicant would repay a future loan in a timely manner. More recently, computer models have been developed to perform such evaluations. These. | 1 Credit channel trade credit channel and inventory investment evidence from a panel of UK firms by Alessandra Guariglia University of Nottingham and Simona Mateut University of Nottingham Abstract In this paper we use a panel of 609 UK firms over the period 1980-2000 to test for the existence of a trade credit channel of transmission of monetary policy and for whether this channel plays an offsetting effect on the traditional credit channel. We estimate error-correction inventory investment equations augmented with the coverage ratio and the trade credit to assets ratio differentiating the effects of the latter variables across firms more or less likely to face financing constraints and firms making a high low use of trade credit. Our results suggest that both the credit and the trade credit channels operate in the UK and that the latter channel tends to weaken the former. Keywords Inventory investment Trade credit Coverage ratio Financing constraints. JEL Classification D92 E22 G32. Corresponding author Alessandra Guariglia School of Economics University of Nottingham University Park Nottingham NG7 2RD United Kingdom. Tel 44-115-8467472. Fax 44-1159514159. E-mail . 2 1. Introduction According to the credit channel monetary policy is transmitted to the real economy through its effects on bank loans bank lending channel and firms balance sheet variables balance sheet channel . In the case of a tightening in monetary policy for instance bank loans supplies to firms are reduced. This diminishes the ability of those firms that are more bank-dependent to carry out desired investment and employment plans. Similarly a tightening in monetary policy is associated with a rise in borrowers debt-service burdens a reduction in the present value of their collateralizable resources and a reduction in their cash flow and net worth. Once again this makes it more difficult and or more costly for firms for which asymmetric information issues are

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