Abstract
AbstractWe evaluate the substitution effect between formal and informal institutions based on a natural experiment in China, i.e., the targeted reserve requirement ratio cut (TRRRC) policy. TRRRC creates a large and persistent discontinuity affecting loan availability for small and micro‐enterprises (SMEs) with sales below specific cut‐offs. Using the regression discontinuity design, we show that the trade credit of SMEs is significantly lower for firms with sales below the cut‐offs, indicating a substitution effect of banking loan on trade credit. Our findings are more pronounced for firms with poor product market performance, weak mortgage capability, young age, and poor financial environment.
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