Abstract
As an effective substitute for bank credit to ease financing constraints, trade credit plays an important role in the operation and growth of enterprises. This paper extends the literature by providing evidence on the relationship between trade credit financing and firm-level sustainable growth. Using the financial statement data of 20,089 Chinese A-share listed firms over the period 2003 to 2017, running a regression using the cross-section regression method and employing the two-stage instrumental-variable regression method in the endogeneity test, the study finds that trade credit has an overall positive and significant impact on the sustainable growth of Chinese firms, especially for firms with higher internal control ability, trade credit financing contributes more to sustainable growth, and the same way with private enterprises, whose growth depends more on trade credit compared to state-owned firms. We further find that the link between trade credit financing and sustainable growth of a firm is stronger in areas with lower access to finance, suggesting that firms with higher dependence on trade credit financing exhibit higher rates of sustainable growth in areas with weaker financial institutions.
Highlights
A large literature has examined the importance of financing for firm growth [1,2,3], and informal finance offers informational advantages whereas formal finance is scalable [4]
The results, overall, indicate that the relationship between trade credit and sustainable growth of firms is not driven by the endogeneity problem
In developing counties whose financial development has been restricted, trade credit can be used as an effective alternative mechanism of bank credit to ease the financing constraints for the enterprise
Summary
A large literature has examined the importance of financing for firm growth [1,2,3], and informal finance offers informational advantages whereas formal finance is scalable [4]. From the perspective of financing, the essence of trade credits is a type of short-term credit with a relaxation effect on financing constraints that is provided to downstream enterprises by upstream enterprises. Due to the lack of an imperfect financial system, financing difficulties have been one of the bottlenecks for the development of enterprises in China In this case, trade credits, as a financing alternative channel, are important for enterprises in China [10]. Fisman and Love [3] provided evidence for the positive effect of trade credit on industry growth in countries with weaker financial institutions, but their evidence was industry-level instead of firm-level. Annalisa et al [15] found a significant and positive role of trade credit in firm growth, but their evidence was based on a sample of eight developed European countries instead of developing ones. Even though Franklin Allen [16] has found that constructive informal financing such as trade credit corresponds to good firm performance in China, there’s still little evidence on how credit trade affects firm’s sustainable growth
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