Trade Credit, Cash Holdings, and Financial Deepening: Evidence from a Transitional Economy

58 Pages Posted: 6 May 2011 Last revised: 30 Aug 2018

See all articles by Wenfeng Wu

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Oliver M. Rui

China Europe International Business School (CEIBS)

Chongfeng Wu

Shanghai Jiao Tong University (SJTU) - Aetna School of Management

Date Written: May 3, 2011

Abstract

This paper investigates the effect of financial deepening on the relationship between trade credit and cash holdings among Chinese listed firms. We first document an asymmetric effect of trade payables and receivables on cash holdings, in that firms hold an additional $0.71 of cash for every $1 of credit payable but use $1 of receivables as a substitute for only $0.15 of cash. We then find that firms in regions with higher levels of financial deepening hold less cash for payables while substituting more receivables for cash. A more highly developed financial sector helps firms to better use trade credit as a short-term financing instrument. Finally, we find that the ratio at which receivables are substituted for cash increased following the implementation of the new receivables pledge policy in 2007, which allowed firms to use receivables as security for loans. This policy event represents an exogenous shock that mitigates the endogeneity concern.

Keywords: Cash, Trade Credit, Financial Deepening, Receivables, Payables

JEL Classification: G31, G32

Suggested Citation

Wu, Wenfeng and Rui, Oliver M. and Wu, Chongfeng, Trade Credit, Cash Holdings, and Financial Deepening: Evidence from a Transitional Economy (May 3, 2011). Available at SSRN: https://ssrn.com/abstract=1830763 or http://dx.doi.org/10.2139/ssrn.1830763

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

Oliver M. Rui (Contact Author)

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

HOME PAGE: http://https://www.ceibs.edu/rui-oliver

Chongfeng Wu

Shanghai Jiao Tong University (SJTU) - Aetna School of Management ( email )

No.535 Fahuazhen Road
Shanghai, 200052
China

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