State-controlled listed firms in China receive preferential treatment when borrowing from commercial banks; in contrast, private controlled firms rely on informal finance and on trade credit. We argue for and find evidence that private firms located in higher social trust regions use more trade credit from suppliers, extend more trade credit to customers, and collect receivables and pay payables more quickly. These findings are enhanced for firms located in provinces with weak protection of property rights. Our results are robust to different measures of social trust, legal environment, and endogeneity. Overall, our results show that social trust helps private firms overcome institutional difficulties in financing their activities.
Bibliographical noteWenfeng Wu acknowledges financial support from the National Science Fund Committee of China (No. 71072056). Michael Firth acknowledges financial support from the Government of the HKSAR (LU340209). Oliver Rui acknowledges financial support of a CEIBS research grant and a National Science Fund Committee of China (71372203) grant.
- Legal development
- Social trust
- Trade credit