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Yi-ni Hsieh and Wea-in Wang
''Credit risk, trade credit and finance: evidence from Taiwanese manufacturing firms''
( 2010, Vol. 30 No.4 )
Trade credit does not use collateral and the hard-to-enforce contracts depend on trust and reputation. Taiwan is a small open economy and suffers more information asymmetry problems than a country with more domestic trade. Exploring this situation, this paper collects data for Taiwanese traded manufacturing firms and links this to the credit-risk index, called the TCRI, to test whether a firm's trade credit will decrease following an increase in its credit-risk index after controlling other factors. The main findings are as follows. First, TCRI adversely affects trade credit, measured as accounts payable relative to short-term debt, and the effect is larger for the small firms. Second, short-term bank loans relative to short-term debt increase with credit risk. Taiwanese banks offer more short-term credit to traded firms who experience a deterioration in their TCRI rating, a higher issuing cost of commercial paper and less access to trade credit.
Keywords: Credit rating, Trade credit, Short-term bank loan, Panel data
JEL: G3 - Corporate Finance and Governance: General
E4 - Money and Interest Rates: General
Manuscript Received : Oct 14 2010 Manuscript Accepted : Nov 16 2010

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