Trade credit in Italy: Evidence from individual firm data

Interfirm late payments are a hot issue in the EU, as witnessed by the 1998 bills passed in Italy and in the U.K. and by the soon to be approved EU Directive. Comprehensive information, especially on the effective own cost, is however almost absent in the literature. The paper provides the first detailed evidence of the trade debt own cost for the Italian manufacturing firms, arising out of discounts offered and of penalties for late payments. It is shown that, comparing also self-defined bank lending rationed and non rationed firms, interfirm credit received is, if ever, only slightly more expensive than bank credit. Cross-section econometric analysis, besides establishing the greater reactivity of credit received rather than granted to the external funds implicit cost, finds that the discount offered for early payments affects significantly credit granted to buyers. The estimates obtained for the basic specifications are robust when the sample is split according to various criteria; larger firms, probably because less financially constrained, react more strongly to sales reductions via longer credit and debt periods.