Bank Credit and Trade Credit: Evidence from Natural Experiments

48 Pages Posted: 6 Sep 2019

See all articles by Shenglan Chen

Shenglan Chen

Inner Mongolia University

Hui Ma

Inner Mongolia University

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Date Written: August 28, 2019

Abstract

Prior studies find mixed evidence about the substitution relation between bank credit and trade credit. In this paper, using two bank interest rate deregulations in China, we revisit the substitution hypothesis by examining how exogenous increases in the availability of bank credit affect trade credit. We find that firms with higher credit risk increased their use of bank credit and reduced their use of trade credit after the 2004 bank interest rate ceiling deregulation, whereas firms with lower credit risk increased their use of bank credit and reduced their use of trade credit after the 2013 bank interest rate floor deregulation. Our results provide supportive evidence for the substitution hypothesis that firms reduce their use of trade credit after the relaxation of bank credit and suggest that bank credit is more favorable short-term financing than trade credit.

Keywords: trade credit; bank credit; China; bank deregulation; quasi-natural experiment

JEL Classification: G21; G32; M41

Suggested Citation

Chen, Shenglan and Ma, Hui and Wu, Qiang, Bank Credit and Trade Credit: Evidence from Natural Experiments (August 28, 2019). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3444209

Shenglan Chen

Inner Mongolia University ( email )

Huhhot, Inner Mongolia, Autonomous Region
China

Hui Ma

Inner Mongolia University ( email )

Huhhot, Inner Mongolia, Autonomous Region
China

Qiang Wu (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

110 8th St
Troy, NY 12180
United States
518-276-3338 (Phone)
518-276-8661 (Fax)

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