In addition to bank loans, trade debts represent an important source of finance for Italian firms, especially in the South and Islands. Using information on company financial statements and loans at bank-firm level, this paper examines the substitutability of bank loans and trade debts in the period 2010-15, which encompasses the sovereign debts crisis and consequent episodes of credit supply shocks.
We find a significant negative elasticity of trade debt to bank loans. This result is consistent with the pecking order theory, according to which firms prefer bank debt to (more costly) trade debt and an exogenous reduction in the former spurs the use of the latter. The substitutability of the two sources of finance allows firms to increase their resilience to credit supply shocks.
