Trade Credit and Capital Structure Adjustment Speed: Evidence From Chinese Listed Firms

Jifeng Cao and Yiwen Cui ()
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Jifeng Cao: School of Accounting, Hubei University of Economics, Wuhan, Hubei Province 430205, P. R. China
Yiwen Cui: Wuhan Technology and Business University, Wuhan, Hubei Province 430065, P. R. China

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 01, 1-21

Abstract: This paper examines the impact of trade credit on the speed of capital structure adjustment toward target leverage using an integrated dynamic partial adjustment model. Trade credit is an important substitute for debt financing and gives firms a low-cost means of adjusting leverage toward the target capital structure in China. We measure trade credit by accounts payable. Using the public listed company data from 1998 to 2016, we find that trade credit accelerates capital structure adjustment. The asymmetric impacts on the capital structure adjustment speed in different situations are also evidenced. The positive impact of trade credit on the speed of capital structure adjustment is more pronounced for over-levered firms. The trade credit also accelerates the speed of capital structure adjustment more quickly for high market share firms. Our results imply that firms use trade credit to save cash flow and restore the leverage level to the target capital structure in China.

Keywords: Speed of adjustment; trade credit; Chinese listed firms; capital structure (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219091521500028

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