Business Cycle And Trade Credit

Allen et al.(2005)investigate Chinese enterprises and find that trade credit from business partners is an important financing channel for enterprises.Tang et al.(2017)investigate Chinese A-share listed companies and find that from 2010 to2013,accounts payable accounted for 18.26%,18.27%,16.45% and 16.44% of total assets respectively,while bank borrowings accounted for 20.13%,17.39%,16.22% and 15.72% of total assets respectively in the same period.As a developing country,China's financial system and related supporting systems need to be improved.Trade credit may play a greater role in promoting national economy than bank loans(Ge ? Qiu,2007;Allen et al.,2005;Lu and Yang,2011).In other countries of the world,trade credit is still an important source of financing for enterprises(Seifert et al.,2013;Atanasova ? Wilson,2004;Petersen ? Rajan,1997;Rajan ? Zingales,1995).Barrot(2016)reports that the ratio of trade credit to bank loans is 3:1 and a comprehensive sample survey of 202,696 SMES in 13 European countries is conducted.Accounts payable averaged is $110 billion,accounting for 20% of total assets,and accounts receivable is US $172 billion,accounting for 30% of total assets.Levine et al.(2018)find that from 1990 to 2011,in a sample of more than 3,500 enterprises in 34 countries,trade credit accounte for 25% of the average total corporate debt.At present,the research on trade credit mainly focuses on the micro perspective,and the research on trade credit from the macro perspective needs to be further expanded.Research on trade credit from a micro perspective focuses on the nature of corporate property rights(Ge ? Qiu,2007),corporate market position(Zhang et al.,2012),and corporate governance(Tang et al.,2017;Zheng et al.,2013;Chen and Wang,2010),management ability(He and Liu,2018),corporate strategy(Fang and Chu,2019),product characteristics(Giannetti et al.,2011)and market competition(Wu et al.,2017;Yu and Pan,2010).Literature on trade credit from a macro perspective mainly focuses on monetary policy(Rao and Jiang,2013b;Lu and Yang,2011;Choi ? Kim,2005),financial System(Chen and Ma,2018;Wang,2014)and uncertainty of economic policy(Jory et al.,2020;Chen and Liu,2018),Financial Crisis(Garcia-Appendini ? Montoriol-Garriga,2013;Love et al.,2007;Hu et al.,2014;Hu et al.,2013),geographical environment(Wang and Sheng,2013),transportation(Chen and Liu,2019),social capital(Kong et al.,2020;Liu et al.,2016;Wu et al.,2014;Liu et al.,2009)and Culture(El Ghoul ? Zheng,2016).From the perspective of macro economic environment,the trade credit decisions,not only can expand the dimension of commercial credit research,can also for how policymakers understand and grasp the market spontaneous adjust enterprise's financing behavior to provide empirical evidence,so from the macroeconomic level continue to expand the study of trade credit has important realistic meaning and academic value(Levy ? Hennessy,2007;Wu,2018;Jiang and Rao,2011).Based on the speculation,the paper investigates the impact of business cycle on trade credit.Firstly,this paper examines the impact of business cycles on trade credit financing decisions.It is found that in the stage of macroeconomic contraction,enterprises' trade credit financing increases,and trade credit financing shows "counter-economic cycle effect".The "counter-economic cycle effect" of trade credit financing is more obvious in enterprises with low quality of internal control and regions with low level of financial development.Further study finds that enterprise bank loan is the economic cycle influence the mechanism of action of the trade credit financing.The reason is that the macro economic downturn,corporate profitability and cash flow falling,the fall in the value of the mortgaged assets,is exacerbated by the fact of the existence of asymmetric information in credit markets of adverse selection and moral risk,increasing risk of corporate defaults,and banks will reduce loan,unable to get enough money to companies in the credit markets will add to the trade credit financing.During the macroeconomic recession,suppliers' trust in customers helps enterprises to obtain more trade credit financing,which highlights the important role of informal institutions in helping enterprises to finance.Secondly,this paper investigates the influence of economic cycle on the decision-making of trade credit supply.It is found that when the macro economy is in a downward period,the supply of trade credit increases,and the supply of trade credit shows a "counter-economic cycle effect".The "counter-economic cycle effect" of trade credit supply is more significant in private enterprises and enterprises with high value of mortgage assets.Further research shows that the market competitive pressure is the mechanism that the economic cycle affects the supply of commercial credit.The reason is that during the macroeconomic recession,the overall market demand declines.In order to maintain the sales scale and market share,suppliers will lock in existing customers and snatch competitors' customers by providing trade credit.The relative negotiating position of suppliers declines during this period,so suppliers will increase the supply of trade credit.In the period of macroeconomic recession,enterprises that get more trade credit from upstream enterprises provide more trade credit to downstream enterprises.Suppliers with higher earnings management provide more trade credit.One possible reason is that these enterprises have obtained more bank loans through earnings management,thus improving the supply capacity of trade credit.Finally,this paper focuses on two interrelated issues.The first issue is whether trade credit financing can alleviate the decline of corporate investment scale in the macroeconomic downturn.The second question is whether the supply of trade credit can improve the company's performance during the macroeconomic downturn.It is found that in the macroeconomic downturn,trade credit financing can alleviate the decline of enterprise investment scale to a certain extent.trade credit supply to a certain extent can alleviate the decline in corporate performance.Possible contributions are follows:(1)The paper expand the study of trade credit from the macro level.In recent years,it has been widely recognized by the academic community to study the financial behavior of micro-enterprises from a macro perspective(Levy ? Hennessy,2007;Wu,2018;Jiang and Rao,2011),this paper examines the economic cycle on the impact of trade credit,trade credit financing and trade credit supply there is a "counter-economic cycle effect",the findings of this paper help to further expand the study of trade credit from the macroeconomic level.We find out the micro-mechanism of the economic cycle affecting the allocation of trade credit.Two mechanisms of economic cycle affecting the allocation of trade credit are found.Specifically,from the perspective of the capital market,there is a "business cycle-corporate bank loans to trade credit financing" transmission mechanism.From the perspective of product market,there is a transmission mechanism of "economic cycle-market competition-commercial credit supply".(2)The research improves the analysis framework of trade credit.Fang and Chu(2019),Lu Zheng and Yang(2011)have constructed the framework of trade credit analysis.This paper uses the above analysis framework for reference,and further brings the competitive hypothesis of business credit into this analysis framework.(3)It is helpful to understand the rules of trade credit allocation and provide empirical evidence for policy makers.As a policy institution,the first job is to understand and predict how the market spontaneous adjustment will affect the financing behavior of enterprises.Specifically in this paper,policy makers should first understand and grasp how changes in the economic cycle affect the trade credit decision-making,on this basis to develop hedging policies,such as monetary policy can be accurate and efficient regulation of corporate behavior,so as to achieve policy objectives.From the perspective of macroeconomic environment,the basic research conclusions of trade credit decision-making can provide empirical evidence and analytical framework for macroeconomic policy makers to understand the impact of economic cycles on corporate financing behavior.As the end,the limitations of the study and the future direction of further research are put forward.First,continue to explore the effective boundaries of trade credit financing.Trade credit as an important supplement to China's banking system(Jason,2013),in different economic cycles,the boundary of the function of trade credit in where? Is trade credit a partial or complete substitute for the system of bank credit? If so,what are the functions that can be replaced? High growth of enterprises and low growth of enterprises,who will get more trade credit financing?These problems need to be further explored.Second,continue to explore the effective boundaries of trade credit supply.In this paper,market competitive pressure is the mechanism of economic cycle affecting the supply of trade credit.In terms of mechanism,are the competitive pressures of product market and service market homogeneous in driving supply effects under different economic cycles? Is there a difference between competitive pressure in differentiated products and services market and competitive pressure in standardized goods and services market in driving the supply effect of commercial credit? There is no further discussion on these issues.Third,explore the possible risks of trade credit financing and trade credit supply.Due to the poor execution of trade credit in recourse,once the downstream enterprises can not repay on time,the risk will quickly spread through the supply chain and there is no effective response mechanism.Therefore,exploring the possible execution defects of informal system is another problem that needs to be explored after this paper.Earnings management to help suppliers to obtain bank loans,so as to improve the supply of trade credit,the potential risk of default with the supplier's trade credit supply channels spread to downstream enterprises,so it is necessary to further explore the existence of such as earnings management,which may aggravate the risk of trade credit supply events.Fourth,variable design needs to be improved.The typical economic cycle usually has four stages: recovery,expansion,contraction and depression.This paper adopts the continuous measurement of the economic cycle.In the robustness analysis,the economic cycle is only divided into contraction period or expansion period(recession or boom period).A more detailed classification of the economic cycle helps to find more important conclusions and detailed evidence.