Inventory investment and the choice of financing in China: Does city-level financial development play a role?

Time: 12 December 2018, 13:00-15:00
Venue:  S314, SOAS University of London (Paul Webley Wing)
Speaker: Alessandra Guariglia, Professor of Financial Economics, University of Birmingham
Chair:  Professor Victor Murinde, AXA Chair in Global Finance, SOAS University of London 

Abstract

We investigate the extent to which Chinese firms make use of different formal and informal channels to finance their inventory investment. To this end, using a panel of 263,828 firms over the period 2004-2009, we estimate error-correction inventory investment models augmented with bank loans and trade credit. We find that both sources of finance have a significant and positive impact on inventory investment. Furthermore, we observe that the impact of bank credit (trade credit) is greater in cities characterized by higher (lower) financial development. This suggests that in the presence of weak financial development, trade credit substitutes for formal bank loans. We further show that this substitution effect is more pronounced for private firms, firms located in southeastern regions, and financially constrained firms. Our results are robust to the use of a variety of specifications and estimation methods

Co-authors: J. Yang., Y. Peng., and Y. Shi