STOCK LIQUIDITY AND CORPORATE TRADE CREDIT STRATEGIES: EVIDENCE FROM CHINA

Umeair Shahzad,Jing Liu,Fukai Luo

doi:10.3846/jbem.2021.15655

Umeair Shahzad, Jing Liu + Show 1 more

Open Access

https://doi.org/10.3846/jbem.2021.15655

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Abstract

This study investigates the nexus of stock liquidity and trade-credit policies in China from 2002 to 2017. The estimates are robust to alternative proxies, various fixed-effects, and the exogenous impact of Chinese split share structure reforms (SSSR) 2005-06 is investigated through the difference-in-difference analysis. The results validate that stock liquidity significantly impacts firms’ capacity to produce more trade credit supplies and less reliant on trade credit demand. The study applied SUEST analysis to investigate the effect of the Chinese institutional setting. The nexus of stock liquidity and trade credit strategies is substantial in state-owned enterprises. Additional analysis revealed that the said association is more visible to credit-constrained and equity-reliant enterprises. The policymakers should focus on market liquidity because it elevates firms’ capacity to mobilize capital through trade credit provisions. The micro aspect of this study suggests that stock liquidity allows managers to shape non-price competitive strategies and avoid excessive usage of trade credits.

Highlights

Trade credit is a type of short-term financing extended by one trader to another; on the one side, it enlarges firms’ purchasing power, and on the other side, it expands trading volume
The debtors’ collection days remain higher than creditors’ payment days in the panel data, indicating that trade debt issuance is more common than trade credit demand from creditors
The study investigates the nexus between stock liquidity and trade credit policies

Summary

Introduction

Trade credit is a type of short-term financing extended by one trader to another; on the one side, it enlarges firms’ purchasing power, and on the other side, it expands trading volume. Many firms commonly use this source of financing in developed and emerging economies (Ferrando & Mulier, 2013). Extant literature unfolds the role of the debt market on enterprises’ capacity to produce more trade credits (Chong & Yi, 2011; Shenoy & Williams, 2017; Tang & Moro, 2020). Small and private enterprises are more enthusiastic about exploiting trade-credit financing (Martínez-Sola et al, 2014). These firms are less efficient in the stock market (Guariglia et al, 2011).

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