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Trade Credit and Capital Structure Adjustment Speed: Evidence From Chinese Listed Firms

Author

Listed:
  • Jifeng Cao

    (School of Accounting, Hubei University of Economics, Wuhan, Hubei Province 430205, P. R. China)

  • Yiwen Cui

    (Wuhan Technology and Business University, Wuhan, Hubei Province 430065, P. R. China)

Abstract

This paper examines the impact of trade credit on the speed of capital structure adjustment toward target leverage using an integrated dynamic partial adjustment model. Trade credit is an important substitute for debt financing and gives firms a low-cost means of adjusting leverage toward the target capital structure in China. We measure trade credit by accounts payable. Using the public listed company data from 1998 to 2016, we find that trade credit accelerates capital structure adjustment. The asymmetric impacts on the capital structure adjustment speed in different situations are also evidenced. The positive impact of trade credit on the speed of capital structure adjustment is more pronounced for over-levered firms. The trade credit also accelerates the speed of capital structure adjustment more quickly for high market share firms. Our results imply that firms use trade credit to save cash flow and restore the leverage level to the target capital structure in China.

Suggested Citation

  • Jifeng Cao & Yiwen Cui, 2021. "Trade Credit and Capital Structure Adjustment Speed: Evidence From Chinese Listed Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 24(01), pages 1-21, March.
    • Handle: RePEc:wsi:rpbfmp:v:24:y:2021:i:01:n:s0219091521500028
    DOI: 10.1142/S0219091521500028
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    Cited by:

    1. Pankaj Sinha & Sandeep Vodwal, 2022. "Impact of size and earnings on speed of partial adjustment to target leverage: a study of Indian companies using two-step system GMM," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 13(2), pages 957-977, April.

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