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Trade Credit, Cash Holdings, and Financial Deepening: Evidence from a Transitional Economy

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Abstract

This paper investigates the effect of financial deepening on the relationship between trade credit and cash holdings among Chinese listed firms. We first document an asymmetric effect of trade payables and receivables on cash holdings, in that firms hold an additional $0.71 of cash for every $1 of credit payable but use $1 of receivables as a substitute for only $0.15 of cash. We then find that firms in regions with higher levels of financial deepening hold less cash for payables while substituting more receivables for cash. A more highly developed financial sector helps firms to better use trade credit as a short-term financing instrument. Finally, we find that the ratio at which receivables are substituted for cash increased following the implementation of the new receivables pledge policy in 2007, which allowed firms to use receivables as security for loans. This policy event represents an exogenous shock that mitigates the endogeneity concern.

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[Wu, Wenfeng ; Wu, Chongfeng] Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China

[Rui, Oliver M.] China Europe International Business School 699 Hongfeng Road, Pudong Shanghai, China


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Source

Journal of Banking & Finance

ISSN:0378-4266

Year:2012

Issue:11

Volume:36

Page:2868-2883

Powered by JCR@2012

ESI Discipline:ECONOMICS & BUSINESS;

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