Trade Credit, Cash Holdings, and Financial Deepening: Evidence from a Transitional Economy

Wenfeng Wu (First Author), Oliver Meng Rui (Participant Author), Chongfeng Wu (Participant Author)

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40 Citations (Web of Science)


This paper investigates the effect of financial deepening on the relationship between trade credit and cash holdings among Chinese listed firms. We first document an asymmetric effect of trade payables and receivables on cash holdings, in that firms hold an additional $0.71 of cash for every $1 of credit payable but use $1 of receivables as a substitute for only $0.15 of cash. We then find that firms in regions with higher levels of financial deepening hold less cash for payables while substituting more receivables for cash. A more highly developed financial sector helps firms to better use trade credit as a short-term financing instrument. Finally, we find that the ratio at which receivables are substituted for cash increased following the implementation of the new receivables pledge policy in 2007, which allowed firms to use receivables as security for loans. This policy event represents an exogenous shock that mitigates the endogeneity concern.
Original languageEnglish
Pages (from-to)2868-2883
JournalJournal of Banking & Finance
Issue number11
Publication statusPublished - 2012

Corresponding author email


  • Cash
  • Financial Deepening
  • Payables
  • Receivables
  • Trade Credit

Indexed by

  • ABDC-A*
  • Scopus
  • SSCI


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