Bank Competition and Firms' Use of Bank Credit and Trade Credit

ABSTRACT Previous research presents conflicting evidence regarding the substitution or supplementary relationship between bank credit and trade credit. In this paper, we construct a local bank competition index for China by weighting bank specific Lerner indices with their regional branch proportions. We explore the impact on firms' use of bank and trade credit of bank competition. Our findings offer support for the substitution hypothesis, suggesting that in more competitive banking areas, firms tend to favour an increase in bank credit usage while simultaneously reducing reliance on trade credit. Analyses based on external credit shocks, accounts payable aging, and accounts receivable provide additional evidence.