Trust and the Provision of Trade Credit

48 Pages Posted: 26 Jan 2016

See all articles by Wenfeng Wu

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Michael Firth

Lingnan University - Department of Finance and Insurance

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: January 24, 2016

Abstract

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

Wu, Wenfeng and Firth, Michael 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

Wenfeng Wu (Contact Author)

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

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

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

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