Credit risk, trade credit and finance: evidence from Taiwanese manufacturing firms

Yi-ni Hsieh () and Wea-in Wang ()
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Yi-ni Hsieh: Shin Hsin University, Department of Economics
Wea-in Wang: Shin-Hsin Unerversity, Department of Economics

Economics Bulletin, 2010, vol. 30, issue 4, 3044-3054

Abstract: Trade credit does not use collateral and the hard-to-enforce contracts depend on trust and reputation. Taiwan is a small open economy and suffers more information asymmetry problems than a country with more domestic trade. Exploring this situation, this paper collects data for Taiwanese traded manufacturing firms and links this to the credit-risk index, called the TCRI, to test whether a firm's trade credit will decrease following an increase in its credit-risk index after controlling other factors. The main findings are as follows. First, TCRI adversely affects trade credit, measured as accounts payable relative to short-term debt, and the effect is larger for the small firms. Second, short-term bank loans relative to short-term debt increase with credit risk. Taiwanese banks offer more short-term credit to traded firms who experience a deterioration in their TCRI rating, a higher issuing cost of commercial paper and less access to trade credit.

Keywords: Credit rating; Trade credit; Short-term bank loan; Panel data (search for similar items in EconPapers)
JEL-codes: E4 G3 (search for similar items in EconPapers)
Date: 2010-11-16
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