The Substitution Effect of Trade Credit Financing in an Emerging Economy: Empirical Evidence from China
Trade credit, together with short term bank credit, forms the main short-term financing channels for enterprises. Using the data of the Chinese listed companies during the period from 1998 to 2009, this paper verifies the substitution effect of trade cred
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The Substitution Effect of Trade Credit Financing in an Emerging Economy: Empirical Evidence from China Qianwei Ying, Wanqing Guo and Tian Yang
Abstract Trade credit, together with short term bank credit, forms the main short-term financing channels for enterprises. Using the data of the Chinese listed companies during the period from 1998 to 2009, this paper verifies the substitution effect of trade credit financing on short-term bank credit in an emerging economy. This study further finds that the substitution effect of trade credit financing trade credit is relatively stronger in private owned enterprise than in state-owned enterprises, and weaker in areas with higher degree of financial development. The results indicate that in China’s imperfect financial system, trade credit is particularly important for private owned enterprise’ financing, while state-owned enterprises are less subjected to financing constraints. In addition, the study found that with the development of the financial market in China, the substitution effect of trade credit will decrease with the improvement of the credit allocation efficiency. Keywords Trade credit · Bank credit · Substitution effect · State ownership · Financial development
48.1 Introduction Trade credit is the loan relationship among enterprises due to the deferred payment or advance payment of buying goods or services. It is a kind of “spontaneous financing” coming from commodity exchange, which has the dual nature of finance and business. Trade credit gain is closely related to corporate business strategy and specific industry circumstance, which is not completely at the enterprises’ will [23]. Q. Ying (B) · W. Guo Business School, Sichuan University, Chengdu 610064, People’s Republic of China e-mail: [email protected] T. Yang School of Overseas Education, Sichuan University, Chengdu 610064, People’s Republic of China J. Xu et al. (eds.), Proceedings of the Eighth International Conference on Management Science and Engineering Management, Advances in Intelligent Systems and Computing 280, DOI: 10.1007/978-3-642-55182-6_48, © Springer-Verlag Berlin Heidelberg 2014
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Extensive application of trade credit makes it an important way of informal short-term financing. Some scholars e.g. Garmaise and Moskowitz [12], Guiso et al. [15] found that even in a developed financial market, informal financing channel is still important for enterprises. In the area with less developed financial market, trade credit even plays a more important role as an alternative channel of external financing [31]. The Trade credit-bank credit substitution hypothesis was first introduced by Meltzer [21]. He found that the conjecture by which credit rationing favors large firms was not established, because banks and financial institutions were not the only source of credit for small firms. He showed that during money tightening period in mid-1950s in the US, firms with relatively large cash balances increased the average length of time for which Trade credit was extended, thus
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