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Working Paper, No. 2008-04, June 2008
Bank Lending, Financing Constraints and SME Investment

Small- and medium-size enterprise (SME) investment opportunities depend on the level of financing constraints that firms face. Earlier research has mainly focused on the controversial argument that cash flow-investment correlations increase with the level of these constraints. The authors focus on bank loans rather than cash flow. Their results show that investment is sensitive to bank loans for unconstrained firms but not for constrained firms, and trade credit predicts investment, but only for constrained firms. They also find that unconstrained firms use bank loans to finance trade credit provided to other firms. The authors' results illustrate alternative mechanisms that firms employ both as borrowers and lenders.

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