Study Of Credit Constraints And Creditor Protection

The paper investigates the credit constraints of Chinese companies listed in China mainland stock market by using a heterogeneous monopolistic competition model. With the financial data of these listed companies, we calculate the credit constraint faced by the listed companies as well as the loss in output caused by it. We find out that the credit constraint of these listed companies is more serious than expected which reflect the negative relationship between credit constraint and capital expenditure.The under-developed legal system for creditor rights protection is considered to be one of the most important reasons for the credit constraint. The limited protection in the legal system with low priority of creditor rights in liquidation sequence, uncertainty of getting paid by using collateral, insufficient information disclosure, and under-protected creditor rights in merger and acquisition will decrease the credit supply in the market because of the higher legal risks faced. In particular, creditors will decrease the supply for the companies with higher credit demand driven by their large capital expenditure.The negative relationship between total debt over assets ratio and capital expenditure is also supported by our empirical evidence. After analyzing the panel data consisted of listed corporations in China, we also find out that the negative relationship could be better observed in the industry with large capital expenditure.