Trade Credit in Transition Economies: Does State Ownership Matter?

Abstract

We investigate the influence of residual state ownership on firm behaviors in providing and receiving trade credit by using a Vietnamese government’s privatization experiment. Our robust results show that a substantial withdrawal of state capital from listed state-owned enterprises (SOEs) does not disturb these firms’ supply of and demand for trade credit, affirming the state sector’s disinclination for trade credit redistribution in the context that trade credit may be not a source of soft budget constraints and local privatization programs have not been motivated by efficiency. The finding is featured as a transitional phenomenon in a state-dominated economy that is inadequately supportive of private sector development and a poor legal system encouraging informal contract enforcement. Vietnamese firms with more accounting conservatism, probably in response to their creditors’ increasing demand for earnings quality, are found to provide less trade credit, implying trade credit-reducing effect of accounting conservatism. We suggest that improvements in financial report audit and corporate governance quality during Vietnam’s recent privatization programs increase the effectiveness of the capital market.

Keywords: trade credit, state ownership, accounting conservatism, privatization experiment, transition economies

JEL Classification: G32, G34, M41, P34