The substitution financing effect of suppliers’ trade credit on customers’ trade credit in China
Abstract
This study investigates the substitution financing effect of suppliers’ trade credit on customers’ trade-credit using Chinese listed firms from 2009 to 2018. Results verify the substitution financing effect of suppliers’ trade credit on customers’ trade credit, indicating that firms with higher suppliers’ trade credit have lower customers’ trade credit. Moreover, suppliers’ trade-credit substitutes customers’ trade credit by alleviating financing constraints. Customer concentration weakens the substitution financing relation. Finally, the substitution financing effect of customers’ trade credit on bank credit is more pronounced than that of suppliers’ trade credit. As exogenous policy shock, the capital market liberalization has no significant impact on the substitution financing relation between heterogeneous trade credits. This study reveals that trade credit is heterogeneous rather than homogeneous. The substitution financing effect also exists in trade credit inside, which expands the existing literature’s understanding of trade credit and the substitution financing theory’s connotation.
Keyword : substitution financing effect, trade credit, suppliers’ trade credit, customers’ trade credit, financing constraints, customer concentration, capital market liberalization
How to Cite
Guo, C., Su, W., & Song, X. (2021). The substitution financing effect of suppliers’ trade credit on customers’ trade credit in China. Journal of Business Economics and Management, 22(6), 1456-1475. https://doi.org/10.3846/jbem.2021.15608
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Han, G. G., Gao, T. M., Wang, L. G., Qi, Y. F., & Wang, X. S. (2011). Research on measurement, volatility, and causes of excess production capacity of Chinese manufacturing industries. Economic Research Journal, 46(12), 18–31 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=40287074
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Itzkowitz, J. (2013). Customers and cash: How relationships affect suppliers’ cash holdings. Journal of Corporate Finance, 19(1), 159–180. https://doi.org/10.1016/j.jcorpfin.2012.10.005
Johnston, D. (2012). Environmental R&D and the uncertainty of future earnings. Journal of Accounting and Public Policy, 31(6), 593–609. https://doi.org/10.1016/j.jaccpubpol.2012.09.004
Johnson, W. C., Kang, J. K., & Yi, S. (2010). The certification role of large customers in the new issues market. Financial Management, 39(4), 1425–1474. https://doi.org/10.1111/j.1755-053X.2010.01118.x
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? The Quarterly Journal of Economics, 112(1), 169–215. http://www.jstor.org/stable/2951280
Kwak, K., & Kim, N. (2020). Concentrate or disperse? The relationship between major customer concentration and supplier profitability and the moderating role of insider ownership. Journal of Business Research, 109(3), 648–658. https://doi.org/10.1016/j.jbusres.2019.09.033
Li, H., Li, D., & Wang, D. (2018a). Reputation effects of big customers on debt financing: Evidence from supplier-customer relationships in China. Journal of Financial Research, 6, 138–154 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=670932635
Li, H., Zheng, G. P., & Li, D. (2018b). Do big customers influence listed firms’ performance: based on supplier-customer relationships in China. Accounting Research, 4, 58–65 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=675459312
Li, K., Morck, R., Yang, F., & Yeung, B. (2014). Firm-specific variation and openness in the emerging market. Review of Economics and Statistics, 86(3), 658–669. https://doi.org/10.1162/0034653041811789
Lin, T. T., & Chou, J. H. (2015). Trade credit and bank loan: Evidence from Chinese firms. International Review of Economics and Finance, 36(2), 17–29. https://doi.org/10.1016/j.iref.2014.11.004
Liu, C. Y., Xiao, Z. P., & Xie, H. (2020). Customer concentration, institutions, and corporate bond contracts. International Journal of Finance & Economics, 25(1), 90–119. https://doi.org/10.1002/ijfe.1731
Lu, Z. F., & Yang, D. M. (2011). Trade credit: substitution financing or buyer’s market? Management World, (4), 6–14, 45 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=37335168
Lu, Z. F., Zhu, J. G., & Zhang, W. N. (2012). Bank discrimination, holding bank ownership, and economic consequences: Evidence from China. Journal of Banking & Finance, 36(2), 341–354. https://doi.org/10.1016/j.jbankfin.2011.07.012
Ma, X. F., Wang, W. M., Wu, J. G., & Zhang, W. L. (2020). Corporate customer concentration and stock price crash risk. Journal of Banking and Finance, 119(10), 105903. https://doi.org/10.1016/j.jbankfin.2020.105903
McGuinness, G., & Hogan, T. (2016). Bank credit and trade credit: Evidence from SMEs over the financial crisis. International Small Business Journal, 34(4), 412–445. https://doi.org/10.1177/0266242614558314
Meng, Q., Li, X., Chan, K. C., & Gao, S. (2020). Does short selling affect a firm’s financial constraints? Journal of Corporate Finance, 60(1), 101531. https://doi.org/10.1016/j.jcorpfin.2019.101531
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261–297. https://www.jstor.org/stable/1809766
Murfin, J., & Njoroge, K. (2015). The implicit costs of trade credit borrowing by large firms. The Review of Financial Studies, 28(1), 112–145. https://doi.org/10.1093/rfs/hhu051
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S. C., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Norden, L., Gregory, F. U., & Wang, T. (2020). Do bank bailouts affect the provision of trade credit? Journal of Corporate Finance, 60(1), 101522. https://doi.org/10.1016/j.jcorpfin.2019.101522
Palacín-Sánchez, M.-J., Canto-Cuevas, F.-J., & Di-Pietro, F. (2019). Trade credit versus bank credit: A simultaneous analysis in European SMEs. Small Business Economics, 53(7), 1079–1096. https://doi.org/10.1007/s11187-018-0101-x
Patatoukas, P. N. (2012). Customer-base concentration: Implications for firm performance and capital markets. The Accounting Review, 87(2), 363–392. https://doi.org/10.2308/accr-10198
Peng, X., Wang, X., & Yan, L. (2019). How does customer concentration affect informal financing? International Review of Economics and Finance, 63(4), 152–162. https://doi.org/10.1016/j.iref.2018.08.022
Petersen, M., & Rajan, R. G. (1997). Trade credit: Theories and evidence. Review of Financial Studies, 10(3), 661–691. https://doi.org/10.1093/rfs/10.3.661
Song, Z., Storesletten, K., & Zilibotti, F. (2011). Growing like China. The American Review, 101(1), 196–233. https://doi.org/10.1257/aer.101.1.196
Wang, D., Liu, Z. J., & Zhao, Z. P. (2016). Supply-chain relationships and bank loans: Based on the analysis of supplier/customer concentration. Accounting Research, 10, 42–49, 96 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=670932635
Wu, M., Huang, P., & Ni, Y. (2017). Capital liberalization and various financial markets: Evidence from Taiwan. The Quarterly Review of Economics and Finance, 66(11), 265–274. https://doi.org/10.1016/j.qref.2017.03.001
Wu, W., Rui, O., & Wu., C. (2012). Trade credit, cash holdings, and financial deepening: evidence from a transitional economy. Journal of Banking & Finance, 36(11), 2868–2883. https://doi.org/10.1016/j.jbankfin.2011.04.009
Xia, C. Y., Zhang, X.W., Cao, C. F., & Xu, N. (2018). Independent director connectedness in China: An examination of the trade credit financing hypothesis. International Review of Economics and Finance, 63(5), 1–17. https://doi.org/10.1016/j.iref.2018.09.010
Zhang, R. R. (2020). Trade credit, cash holdings, and product market competition. The Quarterly Review of Economics and Finance, 78(11), 132–146. https://doi.org/10.1016/j.qref.2020.01.006
Bae, K., Ozoguz, A., Tan, H., & Wirjanto, T. S. (2012). Do foreigners facilitate information transmis-sion in emerging markets? Journal of Financial Economics, 105(1), 209–227. https://doi.org/10.1016/j.jfineco.2012.01.001
Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. https://doi.org/10.1037/0022-3514.51.6.1173
Beck, T., Lin, C., & Ma, Y. (2014). Why do firms evade taxes? The role of information sharing and financial sector outreach. The Journal of Finance, 69(2), 763–817. https://doi.org/10.1111/jofi.12123
Bekaert, G., Harvey, C. R., & Lundblad, C. (2005). Does financial liberalization spur growth? Journal of Financial Economics, 77(1), 3–55. https://doi.org/10.1016/j.jfineco.2004.05.007
Burkart, M., & Ellingsen, T. (2004). In-kind finance: A theory of trade credit. The American Economic Review, 94(3), 569–590. https://doi.org/10.1257/0002828041464579
Campello, M., & Gao, J. (2017). Customer concentration and loan contract terms. Journal of Financial Economics, 123(1), 108–136. https://doi.org/10.1016/j.jfineco.2016.03.010
Casey, E., & O’Toole, C. M. (2014). Bank-lending constraints, trade credit, and alternative financing during the financial crisis: Evidence from European SMEs. Journal of Corporate Finance, 27(4), 173–193. https://doi.org/10.1016/j.jcorpfin.2014.05.001
Cen, L., Chen, F., Hou, Y., & Richardso, G. D. (2018). Strategic disclosures of litigation loss contingencies when customer-supplier relationships are at risk. Accounting Review, 93(2), 137–159. https://doi.org/10.2308/accr-51869
Chang, X., Chen, Y. L., & Dasgupta, S. (2019). Macroeconomic conditions, financial constraints, and firms’ financing decisions. Journal of Banking & Finance, 101(C), 242–255. https://doi.org/10.1016/j.jbankfin.2018.10.016
Chen, S. L., Ma, H., & Wu, Q. (2019). Bank credit and trade credit: Evidence from natural experiments. Journal of Banking and Finance, 108(11), 105616. https://doi.org/10.1016/j.jbankfin.2019.105616
Chen, Z. Q., & Wang, X. Q. (2020). Specific investment, supplier vulnerability, and profit risks. Journal of Business Finance & Accounting, 47(9–10), 1215–1237. https://doi.org/10.1111/jbfa.12450
Chod, J., Lyandres, E., & Yang, S. A. (2019). Trade credit and supplier competition. Journal of Financial Economics, 131(2), 484–505. https://doi.org/10.1016/j.jfineco.2018.08.008
Dhaliwal, D., Judd, J. C., Serfling, M., & Shaikhe, S. (2016). Customer concentration risk and the cost of equity capital. Journal of Accounting & Finance, 61(1), 23–48. https://doi.org/10.1016/j.jacceco.2015.03.005
Fabbri, D., & Klapper, L. F. (2016). Bargaining power and trade credit. Journal of Corporate Finance, 41(6), 66–80. https://doi.org/10.1016/j.jcorpfin.2016.07.001
Fabbri, D., & Menichini, A. M. C. (2010). Trade credit, collateral liquidation, and borrowing constraint. Journal of Financial Economics, 96(3), 413–432. https://doi.org/10.1016/j.jfineco.2010.02.010
Ge, Y., & Qiu, J. (2007). Financial development, bank discrimination, and trade credit. Journal of Banking & Finance, 31(2), 513–530. https://doi.org/10.1016/j.jbankfin.2006.07.009
Giannetti, M., Burkart, M., & Ellingsen, T. (2011). What you sell is what you lend? Explaining trade credit contracts. The Review of Financial Studies, 24(4), 1261–1298. https://doi.org/10.1093/rfs/hhn096
Gupta, N., & Yuan, K. (2009). On the growth effect of stock market liberalizations. Review of Financial Studies, 22(11), 4715–4752. https://doi.org/10.1093/rfs/hhp001
Han, G. G., Gao, T. M., Wang, L. G., Qi, Y. F., & Wang, X. S. (2011). Research on measurement, volatility, and causes of excess production capacity of Chinese manufacturing industries. Economic Research Journal, 46(12), 18–31 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=40287074
Huang, J., Yang, W. S., & Tu, Y. L. (2020). Financing mode decision in a supply chain with financial constraint. International Journal of Production Economics, 220(2), 107441. https://doi.org/10.1016/j.ijpe.2019.07.014
Itzkowitz, J. (2013). Customers and cash: How relationships affect suppliers’ cash holdings. Journal of Corporate Finance, 19(1), 159–180. https://doi.org/10.1016/j.jcorpfin.2012.10.005
Johnston, D. (2012). Environmental R&D and the uncertainty of future earnings. Journal of Accounting and Public Policy, 31(6), 593–609. https://doi.org/10.1016/j.jaccpubpol.2012.09.004
Johnson, W. C., Kang, J. K., & Yi, S. (2010). The certification role of large customers in the new issues market. Financial Management, 39(4), 1425–1474. https://doi.org/10.1111/j.1755-053X.2010.01118.x
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? The Quarterly Journal of Economics, 112(1), 169–215. http://www.jstor.org/stable/2951280
Kwak, K., & Kim, N. (2020). Concentrate or disperse? The relationship between major customer concentration and supplier profitability and the moderating role of insider ownership. Journal of Business Research, 109(3), 648–658. https://doi.org/10.1016/j.jbusres.2019.09.033
Li, H., Li, D., & Wang, D. (2018a). Reputation effects of big customers on debt financing: Evidence from supplier-customer relationships in China. Journal of Financial Research, 6, 138–154 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=670932635
Li, H., Zheng, G. P., & Li, D. (2018b). Do big customers influence listed firms’ performance: based on supplier-customer relationships in China. Accounting Research, 4, 58–65 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=675459312
Li, K., Morck, R., Yang, F., & Yeung, B. (2014). Firm-specific variation and openness in the emerging market. Review of Economics and Statistics, 86(3), 658–669. https://doi.org/10.1162/0034653041811789
Lin, T. T., & Chou, J. H. (2015). Trade credit and bank loan: Evidence from Chinese firms. International Review of Economics and Finance, 36(2), 17–29. https://doi.org/10.1016/j.iref.2014.11.004
Liu, C. Y., Xiao, Z. P., & Xie, H. (2020). Customer concentration, institutions, and corporate bond contracts. International Journal of Finance & Economics, 25(1), 90–119. https://doi.org/10.1002/ijfe.1731
Lu, Z. F., & Yang, D. M. (2011). Trade credit: substitution financing or buyer’s market? Management World, (4), 6–14, 45 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=37335168
Lu, Z. F., Zhu, J. G., & Zhang, W. N. (2012). Bank discrimination, holding bank ownership, and economic consequences: Evidence from China. Journal of Banking & Finance, 36(2), 341–354. https://doi.org/10.1016/j.jbankfin.2011.07.012
Ma, X. F., Wang, W. M., Wu, J. G., & Zhang, W. L. (2020). Corporate customer concentration and stock price crash risk. Journal of Banking and Finance, 119(10), 105903. https://doi.org/10.1016/j.jbankfin.2020.105903
McGuinness, G., & Hogan, T. (2016). Bank credit and trade credit: Evidence from SMEs over the financial crisis. International Small Business Journal, 34(4), 412–445. https://doi.org/10.1177/0266242614558314
Meng, Q., Li, X., Chan, K. C., & Gao, S. (2020). Does short selling affect a firm’s financial constraints? Journal of Corporate Finance, 60(1), 101531. https://doi.org/10.1016/j.jcorpfin.2019.101531
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261–297. https://www.jstor.org/stable/1809766
Murfin, J., & Njoroge, K. (2015). The implicit costs of trade credit borrowing by large firms. The Review of Financial Studies, 28(1), 112–145. https://doi.org/10.1093/rfs/hhu051
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S. C., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Norden, L., Gregory, F. U., & Wang, T. (2020). Do bank bailouts affect the provision of trade credit? Journal of Corporate Finance, 60(1), 101522. https://doi.org/10.1016/j.jcorpfin.2019.101522
Palacín-Sánchez, M.-J., Canto-Cuevas, F.-J., & Di-Pietro, F. (2019). Trade credit versus bank credit: A simultaneous analysis in European SMEs. Small Business Economics, 53(7), 1079–1096. https://doi.org/10.1007/s11187-018-0101-x
Patatoukas, P. N. (2012). Customer-base concentration: Implications for firm performance and capital markets. The Accounting Review, 87(2), 363–392. https://doi.org/10.2308/accr-10198
Peng, X., Wang, X., & Yan, L. (2019). How does customer concentration affect informal financing? International Review of Economics and Finance, 63(4), 152–162. https://doi.org/10.1016/j.iref.2018.08.022
Petersen, M., & Rajan, R. G. (1997). Trade credit: Theories and evidence. Review of Financial Studies, 10(3), 661–691. https://doi.org/10.1093/rfs/10.3.661
Song, Z., Storesletten, K., & Zilibotti, F. (2011). Growing like China. The American Review, 101(1), 196–233. https://doi.org/10.1257/aer.101.1.196
Wang, D., Liu, Z. J., & Zhao, Z. P. (2016). Supply-chain relationships and bank loans: Based on the analysis of supplier/customer concentration. Accounting Research, 10, 42–49, 96 (in Chinese). http://qikan.cqvip.com/Qikan/Article/Detail?id=670932635
Wu, M., Huang, P., & Ni, Y. (2017). Capital liberalization and various financial markets: Evidence from Taiwan. The Quarterly Review of Economics and Finance, 66(11), 265–274. https://doi.org/10.1016/j.qref.2017.03.001
Wu, W., Rui, O., & Wu., C. (2012). Trade credit, cash holdings, and financial deepening: evidence from a transitional economy. Journal of Banking & Finance, 36(11), 2868–2883. https://doi.org/10.1016/j.jbankfin.2011.04.009
Xia, C. Y., Zhang, X.W., Cao, C. F., & Xu, N. (2018). Independent director connectedness in China: An examination of the trade credit financing hypothesis. International Review of Economics and Finance, 63(5), 1–17. https://doi.org/10.1016/j.iref.2018.09.010
Zhang, R. R. (2020). Trade credit, cash holdings, and product market competition. The Quarterly Review of Economics and Finance, 78(11), 132–146. https://doi.org/10.1016/j.qref.2020.01.006