Trade credit in China: Exploring the link between short term debt and payables

Abstract

Trade credit constitutes an essential element of short-term financing for most firms, especially for small and medium-sized enterprises. This paper investigates the dynamics between short-term bank debt and payables among 1,525 Chinese small and medium-sized listed companies over the period of 2008-2016. The results suggest that an increase in stock and receivables is financed by both bank credit and payables. In addition, we find that bank credit and payables substitute each other. We also uncover a strong substitution effect among weak firms, possibly linked to the fact that weak firms struggle to access additional bank finance and thus are forced to rely on suppliers to support their growth. The substitution effect between payables and bank credit is robust to different cash conversion cycles and to the firm's liquidity.

Corporate innovation and trade credit demand: Evidence from China

“…The descriptive estimates of the main variables used in this study are reported in Table 3. The average value of the creditors' payment days (Cull et al, 2009; Tang & Moro, 2020), quantity and quality of innovation (Shahzad, Luo, Pang, et al, 2021), and control variables (Cai et al, 2014; Cull et al, 2009) are consistent with the previous studies in China. Next, the Pearson correlation analysis is applied to confirm multicollinearity issues in our panel data; the estimations are reported in Appendix .…”

Short-term debt and trade credit: Evidence on a non-linear relationship

“…Yazdinejad and Jokar (2019) find that as firms in metropolitans have more opportunities to utilize different types of bank loans, they have less need for finance from suppliers. Lin and Chou (2015) and Tang and Mora (2020) investigate the relationship between bank credit and trade credit in China, and also find empirical evidence supporting the substitution hypothesis between the two financing sources.…”

“…Bank credit is provided to firms in the form of short-term loans, invoice discounting, overdrafts, and so on. Loans are granted after banks have evaluated firms' creditworthiness, and this could prove problematic in an environment with high levels of information asymmetry (Tang & Mora, 2020). Trade credit is catered to buyers through payment extensions, and this grace period typically ranges from 30 to 90 days.…”

“…Trade credit is typically more expensive due to a higher direct cost of funds compared to banks (Atanasova, 2007;Jory et al, 2020;Petersen & Rajan, 1997;Tang & Mora, 2020). This results in a pecking order in terms of short-term financing sources: firms prioritize bank credit to keep financing costs low, and will use trade credit only when they are unable to take on bank loans.…”

“…Chen et al (2019) show that with the deregulation of bank interest rate ceiling and floor that allows banks to compete more freely, firms in China show their strong preference for short-term bank debt compared to trade credit. Tang and Mora (2020) investigate the relationship between payables and short-term bank debt using a sample of 1,525 Chinese small and medium-sized listed non-financial firms from 2008 to 2016 to see whether SMEs in China follow a substitution or complementarity pattern in financing investments. The research points out several notable points.…”