Do trade credit and bank credit complement or substitute each other in public and private firms?

In this study, we analyse the complementary and substitution effect between trade credit (TC) and short-term bank credit (BC) for public and private firms in the UK. Using a sample of 254,352 firm-year observations over the period 2008-2021, we find TC and BC are substitutes for public firms that have easy access to cheap external finance. In contrast, TC and BC are complements for private firms that have limited access to alternative financing resources, such as financial markets. Importantly, our results show that public firms are faster in adjusting towards the optimum level of their TC and BC than private firms in an attempt to determine the appropriate mix between these two types of financing. Our study introduces new evidence on the efficient management of TC and BC for public and private firms.