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Trade-Credit Financing under Financial Constraints: A Relational Perspective and Evidence from Listed Companies in China

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  • Xiaojun Shi
  • Aoran Wang
  • Songtao Tan

Abstract

This article finds that relational debt financing, especially trade credit, is a viable channel to which a firm resorts when facing the binding financial constraints of formal credit in China. We present strong evidence indicating that the substitution of trade credit for bank credit increases when financial constraints are aggravated, regardless of the size of the firm. The countercyclicity of the substitution over economic cycles is more evident for financially constrained firms. Moreover, institutional factors, such as political connections and creditor protection, have substantial effects on financial constraint smoothing, ameliorating reliance on costlier trade-credit financing. Our results endure an array of robustness checks, including using alternative definitions of trade credit and formal credit and financial constraint measurement. An export interest-subsidy experiment presents corroborating evidence.

Suggested Citation

  • Xiaojun Shi & Aoran Wang & Songtao Tan, 2020. "Trade-Credit Financing under Financial Constraints: A Relational Perspective and Evidence from Listed Companies in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(4), pages 860-893, March.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:4:p:860-893
    DOI: 10.1080/1540496X.2018.1555462
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    Cited by:

    1. Umeair Shahzad & Jing Liu & Faisal Mahmood & Fukai Luo, 2021. "Corporate innovation and trade credit demand: Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1591-1606, September.
    2. Mai Dao & Trung Pham & Hongkang Xu, 2022. "Internal control effectiveness and trade credit," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1423-1452, November.
    3. Thang, Doan Ngoc & Ha, Le Thanh, 2022. "Trade credit and global value chain: Evidence from cross-country firm-level data," International Economics, Elsevier, vol. 171(C), pages 110-129.

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