Trust and the Provision of Trade Credit

State-controlled listed firms in China receive preferential treatment when borrowing from commercial banks; in contrast, private controlled firms rely on informal finance and on trade credit. We argue for and find evidence that private firms located in higher social trust regions use more trade credit from suppliers, extend more trade credit to customers, and collect receivables and pay payables more quickly. These findings are enhanced for firms located in provinces with weak protection of property rights. Our results are robust to different measures of social trust, legal environment, and endogeneity. Overall, our results show that social trust helps private firms overcome institutional difficulties in financing their activities.

Keywords: Social Trust; Legal development; Trade Credit; China

JEL Classification: G32; O16; Z13

Suggested Citation: Suggested Citation

Wu, Wenfeng and Firth, Michael and Rui, Oliver M. and Rui, Oliver M., Trust and the Provision of Trade Credit (January 24, 2016). Journal of Banking and Finance, 2014, Available at SSRN: https://ssrn.com/abstract=2721475 or http://dx.doi.org/10.2139/ssrn.2721475