Trade credit and bank credit as alternative governance structures in South Africa: evidence from banking sector development

Abstract

AUTHORSShame Mugova ARTICLE INFOShame Mugova (2017 INTRODUCTIONCorporate governance practices have a direct influence on both investment and access to capital. Banks and other investors evaluate the corporate governance structures of a firm before making an investment decision. It is also highly likely that poor corporate governance practices can result in failure to access bank credit, raise equity capital or result in issuing bonds with low market acceptance. Banks and creditors monitor and provide governance mechanism for firms. Bank loan and trade credit are alternative sources of working capital finance, the choice between the two is also a choice of preferred governance systems. Bank credit and short-debt such trade credit are both likely to constitute two significant corporate governance mechanisms (Florackis, 2008). It is conventional practice that creditors perform a dynamic role in the governance of firms even in cases where there is no payment default (Nini, Smith, & Sufi, 2012). The role of creditors has largely been neglected as most analyses of corporate governance tend to focus on shareholders (Baird & Rasmussen, 2006