The Flight of the Millionaires: Freedom of Movement and Trade Credit
Posted: 16 Oct 2020
Date Written: October 15, 2020
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: Suggested Citation