Substitution effects in SME finance
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2018-03-20
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We investigate whether SMEs with demand for credit increase their trade credit usage after they experience a negative shock to bank credit. We base our analysis on a large sample of SMEs from the five biggest European countries. First, SMEs’ ability to substitute largely depends on their credit quality. Second, substitution decreases during the financial crisis of 2007-09. Third, high credit quality firms with moderate financial constraints are the most likely to substitute. We confirm these results on a subsample with matched bank-firm data. The evidence highlights the limits of substitution in SME finance.