Law and Borders: Entrepreneurs’ Immigration Status and Trade Credit

Abstract

We examine whether the exclusive nature of the power of a country’s legal institutions to enforce entrepreneurs within its territories is a potential concern for creditors when extending trade credit. Utilizing the disclosure of the residency status of controlling shareholders in China, we show that their overseas residence rights negatively influence firms’ ability to obtain trade credit. This negative association is mitigated if the overseas jurisdiction concerned has an extradition treaty with China. For jurisdictions without such treaties, their bilateral political relations with China, the quality of their national governance, and that of their rule of law also have a bearing. Our results are robust to the introduction of the Hong Kong national security law as a source of exogenous variation in the boundary of domestic law. Our results offer new insights into how the reach of law across borders can affect firms’ financing activities.

Keywords: Law; Borders; Immigration; Overseas Residence Rights; Trade Credit

JEL Classification: G32;G34