Abstract
ABSTRACTThis article finds that relational debt financing, especially trade credit, is a viable channel to which a firm resorts when facing the binding financial constraints of formal credit in China. We present strong evidence indicating that the substitution of trade credit for bank credit increases when financial constraints are aggravated, regardless of the size of the firm. The countercyclicity of the substitution over economic cycles is more evident for financially constrained firms. Moreover, institutional factors, such as political connections and creditor protection, have substantial effects on financial constraint smoothing, ameliorating reliance on costlier trade-credit financing. Our results endure an array of robustness checks, including using alternative definitions of trade credit and formal credit and financial constraint measurement. An export interest-subsidy experiment presents corroborating evidence.
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