Working Paper, University of Utah, Department of Economics 2009-09
The recent macro monetary policy debate over the existence of bank lending channels focuses on short-term bank borrowing versus short-term non-bank borrowing by firms. The approach is macro using aggregate manufacturing corporation data from the QFR of the US Census Bureau. In the present paper, the approach is micro using Compustat corporation data. In the macro approach, the price-substitution effect between bank and non-bank lending is studied to test the existence of a bank lending channel. Pricing (interest rates) data are not available in the micro data. However, the scale effect (Slutsky equation) on term debt structure can be studied. Using regression analysis, covering the period 1995 to 2007 with an unbalanced panel sample of 30,789 observations, the log of the ratio of accounts payable in trade to the long-term debt is regressed on revenue, assets, net income, retained earnings, and dummy variables for industry classifications and monetary conditions. The revenue-size effect was positively related to the debt ratio, assets were negatively related, and retained earnings were positively related. Industry effects and monetary conditions effects varied. The conclusion is that firms can insulate themselves from the effects of monetary policy by relying on trade credit and retained earnings.