Trade credit, cash holdings, and financial deepening: Evidence from a transitional economy

Wenfeng Wu, Oliver Rui and Chongfeng Wu

Journal of Banking & Finance, 2012, vol. 36, issue 11, 2868-2883

Abstract: This paper investigates the effect of financial deepening on the relationship between trade credit and cash holdings among Chinese listed firms. We first document an asymmetric effect of trade payables and receivables on cash holdings, in that firms hold an additional $0.71 of cash for every $1 of credit payable but use $1 of receivables as a substitute for only $0.15 of cash. We then find that firms in regions with higher levels of financial deepening hold less cash for payables while substituting more receivables for cash. A more highly developed financial sector helps firms to better use trade credit as a short-term financing instrument. Finally, we find that the ratio at which receivables are substituted for cash increased following the implementation of the new receivables pledge policy in 2007, which allowed firms to use receivables as security for loans. This policy event represents an exogenous shock that mitigates the endogeneity concern.

Keywords: Cash; Trade credit; Financial deepening; Receivables; Payables (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:11:p:2868-2883

DOI: 10.1016/j.jbankfin.2011.04.009

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