| Abstract | Financial shocks affect firms’ performance through credit constraints. Factors that determine credit constraints, however, are not sufficiently investigated in existing literature. This paper identifies, analyses, and tests one such factor, the Cash Conversion Cycle (i.e. CCC). Specifically, we develop a “Bank-Firm” model which incorporates incomplete information in the sense that firms’ productivities are private information for the bank. In a heterogeneous firm setting, incomplete information delivers endogenous credit constraints that are optimal to the bank. In such optimal credit constraints, firms CCC plays a critical role, determing the level of the credit constraint. We show empirically that: (1) CCC is an important factor affecting the credit constraint; (2) given other condition constant, the longer CCC, the stronger credit constraint the firm faces. Such evidence provides strong support to our theoretical model. |