Government arrears repayment and access to trade credit: Evidence from China

This study examines how the government arrears repayment policy—an institutional arrangement that accelerates local governments' payments to private contractors—affects private firms' trade credit availability from upstream suppliers. The results of the Difference-in-Differences (DID) test, conducted using a novel dataset constructed from private enterprises' annual reports and the Qichacha platform, indicate that the policy exerts a significant positive effect on firms' trade credit access from their upstream suppliers. This positive impact is more pronounced for firms exhibiting weaker profitability, tighter financing constraints, and lower supplier concentration, as well as for firms operating in regions with intensified fiscal pressure, less favorable business environments, and lower social trust. Mechanism analysis shows that the policy strengthens firms' bargaining power, reduces business risk, and improves firm reputation, thereby facilitating obtaining trade credit from their suppliers. Additionally, with enhanced availability of trade credit, firms reduce reliance on bank loans, particularly short-term loans. Finally, our results also indicate that the policy strengthens relationships between firms and their supply chain collaborators, increasing transaction frequency and enhancing capital fluidity in the supply chain. Overall, our study highlights how institutional safeguards play a crucial role in stabilizing credit chains and, more broadly, strengthening supply chain relationships.