Study On Substitution Between Trade Credit Financing And Bank Loan

As two main sources of short-term financing, trade credit and bank loan are of great significance to meet the needs of liquidity and ensure enterprises’ going concern. Enterprises cannot finance adequately through formal channels, as the result of credit rationing in China’s financial market, especially the one based on property right. The lack of bank loan increases enterprises’ demand for trade credit. As an informal channel, trade credit becomes an important supplement to the formal financial system gradually. From financing perspective, the substitution hypothesis, based upon Credit Rationing Theory, supports the substitution effect between trade credit and short-term bank loan. In the process of commercial transaction, trade credit is used spontaneously, playing both financing and operating roles. In terms of business operation, trade credit can be acted as a competition strategy. Weak market participants get competitive advantages by providing strong players with trade credit actively and voluntarily. Ease access to trade credit reduces enterprises’demand for bank loan. According to the theories of both Buyer’s Market and Seller’s Market, the market competition hypothesis, also proves the substitution between trade credit and short-term bank loan.The methodology which the study adopts includes theoretical analysis and empirical research. On the basis of literature review, both the current institutional background and related theories are analyzed. Comprehensive empirical tests present persuasive evidences on the hypotheses, by using a balanced panel data set of listed Chinese companies.First, the study empirically examines whether the substitution relationship exists or not. Then, both effectiveness and explanatory power of the two hypotheses will be tested separately. This study shows that the substitution relationship is significant in Chinese listed companies. Compared with state-owned listed companies, the substitution effect is stronger in non-state-owned listed companies. The substitution hypothesis is verified by taking property right as the measure of credit rationing. The substitution in listed companies with strong market competitiveness is more significant than listed companies with weak market competitiveness. Having compared the market competitiveness of listed companies, the study confirms the market competition hypothesis. Through comparison for empirical test results, including values and significance, further analyses find that market competitiveness gives a greater effect on substitution relationship than credit rationing, which concludes that, compared with the substitution hypothesis, the market competition hypothesis show stronger power in explaining substitution effect.The conclusions indicate that enterprises’financing activities and decisions can be restricted by credit rationing. The credit rationing reduces the efficiency of resources allocation and makes it difficult for small and medium-sized enterprises to finance. In order to solve such problems and provide fair and reasonable financing environment, the financial system reform should be deepened and the credit support from formal financial system should be improved. At the same time, considering market competitiveness has a greater influence on short-term financing decisions, promoting management level and increasing market competitiveness, are of great importance to broaden financing channels and increase financing capacity, too.