Why Do Financially Constrained Suppliers Provide Trade Credit in China? An Extended Redistribution View

Extending the existing redistribution theory to Chinese manufacturing firms, we find that the provision of trade credit through investing in accounts receivable is significantly correlated with the amount of funds raised through providers' equity finance, suggesting that firms not only redistribute the bank credit they borrow but also the funds they raise from the equity market via trade credit to their customers. We also find that financially constrained suppliers, or non-SOEs, or suppliers with excess capacity, or suppliers in an economic downturn, all of which face greater financial constraint, redistribute more funds raised from the equity market via trade credit to their customers than their respective counterparts, that is, less financially constrained suppliers, SOEs, suppliers with less excess capacity or suppliers in a good economic situation. For example, a one-standard-deviation increase in new equity raised (⊿Equity) creates a 21.1% increase in funding accounts receivable next year for non-SOE firms. This result supports our expectation that financially constrained suppliers are forced to extend their trade credit through costly equity finance to customers with strong market power. Overall we contend that in China the SOEs' monopoly market power and suppliers' severe excess capacity force financially constrained suppliers to redistribute the funds raised from the equity market via trade credit to their customers