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

Author

Listed:
  • Yi-ni Hsieh

    () (Shin Hsin University, Department of Economics)

  • Wea-in Wang

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

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.

Suggested Citation

  • Yi-ni Hsieh & Wea-in Wang, 2010. "Credit risk, trade credit and finance: evidence from Taiwanese manufacturing firms," Economics Bulletin, AccessEcon, vol. 30(4), pages 3044-3054.
  • Handle: RePEc:ebl:ecbull:eb-10-00627
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I4-P281.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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