The substitution effect of trade credit financing in an emerging economy: Empirical evidence from China

Abstract

Trade credit, together with short term bank credit, forms the main short-term financing channels for enterprises. Using the data of the Chinese listed companies during the period from 1998 to 2009, this paper verifies the substitution effect of trade credit financing on short-term bank credit in an emerging economy. This study further finds that the substitution effect of trade credit financing trade credit is relatively stronger in private owned enterprise than in state-owned enterprises, and weaker in areas with higher degree of financial development. The results indicate that in China’s imperfect financial system, trade credit is particularly important for private owned enterprise’ financing, while state-owned enterprises are less subjected to financing constraints. In addition, the study found that with the development of the financial market in China, the substitution effect of trade credit will decrease with the improvement of the credit allocation efficiency.