The effects of financing constraints on firms' use of trade credit and other alternative financing sources.

Summary This thesis consists of four essays that examine the effects of financing constraints on the use of trade credit (TC) and other alternative sources of firm financing. In the first essay, we study the effects of constraints on bank borrowing (BL) on the use of CT by Vietnamese firms. Specifically, we study the effect of size on the choice between the two types of financing. We find that large firms when rationed on BL rely more on CT than small and medium-sized enterprises (SMEs). In particular, we find that large firms that have been denied credit use more CT while SMEs in the same situation use less. In the second essay, we study the effects of BL constraints on CT use as a function of firm size, age, and institutional development across countries. Our results suggest that CT and BL tend to be substitutes for larger, older firms and those located in developed countries (stronger institutional development). In contrast, CT and BL are complementary for younger, smaller firms and those located in developing countries (weak institutional development). This result is particularly clear in the case of credit denial. In our third essay, we study the effects of BL constraints on the use of six alternative sources of financing by SMEs worldwide. The forms of financing studied are: CT, leasing, credit cards, informal finance, funds from family and friends, and equity. Our results generally suggest that bank-rationed SMEs tend to rely more on funds from family and friends and loans from loan sharks. We also find that they use alternative financing methods more to finance working capital than to finance new investments. In the final test, using a sample of non-financial firms in the S&P 500, we examine the interaction between the use of commercial paper (CP), bank lines of credit (CL), and CT over the period 2003 to 2014. Our results suggest that firms with the highest refinancing risk borrow more in the form of CLs and TCs than in the form of CP. This effect is stronger for CLs. We also find that the higher the level of information asymmetry, the more firms use CL and TC relative to CP. On the other hand, the more severe the moral hazard problems, the more firms favor CP over CL and TC.