Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short-Term Debt

In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short-term bank credit more than long-term credit. Firms responded by cutting short-term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade cr...

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Bibliographic Details
Published in:The Journal of finance (New York) 2019-12, Vol.74 (6), p.2875-2914
Main Authors: RESTREPO, FELIPE, CARDONA-SOSA, LINA, STRAHAN, PHILIP E.
Format: Article
Language:English
Subjects:
Bank loans
Banking
Companies
Corporate debt
Credit
Credit policy
Investments
Liquidity
Short term debt
Taxation
Trade
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Summary:In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short-term bank credit more than long-term credit. Firms responded by cutting short-term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12832