Trade credit financing and sustainable growth of firms: Empirical evidence from China

Abstract

As an effective substitute for bank credit to ease financing constraints, trade credit plays an important role in the operation and growth of enterprises. This paper extends the literature by providing evidence on the relationship between trade credit financing and firm-level sustainable growth. Using the financial statement data of 20,089 Chinese A-share listed firms over the period 2003 to 2017, running a regression using the cross-section regression method and employing the two-stage instrumental-variable regression method in the endogeneity test, the study finds that trade credit has an overall positive and significant impact on the sustainable growth of Chinese firms, especially for firms with higher internal control ability, trade credit financing contributes more to sustainable growth, and the same way with private enterprises, whose growth depends more on trade credit compared to state-owned firms. We further find that the link between trade credit financing and sustainable growth of a firm is stronger in areas with lower access to finance, suggesting that firms with higher dependence on trade credit financing exhibit higher rates of sustainable growth in areas with weaker financial institutions.