Political connections and informal financing: use of trade credit in China

Abstract

Using a dataset of listed non-state-owned enterprises in China, we show that politically connected firms have a greater difficulty in obtaining trade credit than non-connected firms. This credit discrimination against politically connected firms strengthens when firms locate in regions with lower-quality legal systems or suppliers have greater bargaining power. Further analysis suggests that the lower credit reputation of politically connected firms stems from suppliers’ concern about contract enforceability, that is, politically connected firms receive regulatory favours from government, which can create obstacles to the collection of trade credit through the legal system. Our study contributes to the existing literature by investigating the impact of political connections on informal financing activities, and by revealing the asymmetric influence of political connections on formal and non-formal financing channels.

Keywords

• Trade credit
• political connections
• limited contract enforceability
• legal system