The Flight of the Millionaires: Freedom of Movement and Trade Credit

Posted: 16 Oct 2020

See all articles by Changqin Luo

Changqin Luo

Zhongnan University of Economics and Law

Hanwen Sun

University of Bath, School of Management

Guochao Yang

Zhongnan University of Economics and Law; Zhongnan University of Economics and Law

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: October 15, 2020

Abstract

We examine whether entrepreneurs’ freedom of movement can be a potential concern for creditors when extending trade credit. Utilizing controlling shareholders’ overseas residency status as a proxy for freedom of movement in Chinese firms, we show that their mobility negatively influences firms’ ability to obtain trade credit, yet the negative association is mitigated if the overseas jurisdiction has an extradition treaty with China. The fleeing entrepreneurs concern of trade creditors is especially detrimental to firms that are perceived as less trustworthy ex ante (i.e., lower social trust, greater expropriation risk, and higher mobility of assets). Our results, through the lens of trade credit, shed light on the hidden costs of entrepreneurs’ freedom in corporate financing activities by echoing the idea that “freedom is never free”.

Keywords: Freedom of Movement; Mobility; Residency; Control Rights; Trade Credit; Trust

JEL Classification: G32;G34

Suggested Citation

Luo, Changqin and Sun, Hanwen and Yang, Guochao and Yang, Guochao and Zhang, Bohui, The Flight of the Millionaires: Freedom of Movement and Trade Credit (October 15, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710484

Changqin Luo

Zhongnan University of Economics and Law ( email )

No.143, Wuluo Road
Wuhan, Hubei 430073
China

Hanwen Sun (Contact Author)

University of Bath, School of Management ( email )

School of Management, University of Bath
Bath
Bath, BA2 7AY
United Kingdom

Guochao Yang

Zhongnan University of Economics and Law ( email )

No.143, Wuluo Road
Wuhan, Hubei 430073
China

Zhongnan University of Economics and Law ( email )

No.143, Wuluo Road
Wuhan, Hubei 430073
China

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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