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Credit risk, trade credit and finance: evidence from Taiwanese manufacturing firms

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  • Yi-ni Hsieh

    ()
    (Shin Hsin University, Department of Economics)

  • Wea-in Wang

    ()
    (Shin-Hsin Unerversity, Department of Economics)

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    Abstract

    Trade credit does not use collateral and the hard-to-enforce contracts depend on trust and reputation. Taiwan is a small open economy and suffers more information asymmetry problems than a country with more domestic trade. Exploring this situation, this paper collects data for Taiwanese traded manufacturing firms and links this to the credit-risk index, called the TCRI, to test whether a firm's trade credit will decrease following an increase in its credit-risk index after controlling other factors. The main findings are as follows. First, TCRI adversely affects trade credit, measured as accounts payable relative to short-term debt, and the effect is larger for the small firms. Second, short-term bank loans relative to short-term debt increase with credit risk. Taiwanese banks offer more short-term credit to traded firms who experience a deterioration in their TCRI rating, a higher issuing cost of commercial paper and less access to trade credit.

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I4-P281.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 30 (2010)
    Issue (Month): 4 ()
    Pages: 3044-3054

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    Handle: RePEc:ebl:ecbull:eb-10-00627

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    Related research

    Keywords: Credit rating; Trade credit; Short-term bank loan; Panel data;

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