The Dark Side of Political Connections in Financing: Evidence from the Use of Trade Credit in China

This paper studies the impact of political connections on firms’ informal financing activities. Using the data of listed non-State owned enterprises (non-SOEs) in China, we show that connected firms have a greater difficulty in obtaining trade credit, and on average receive less trade credit than non-connected firms. Meanwhile, connected firms incur a higher cost for obtained trade credit, which primarily comes in the form of higher-cost notes payable, rather than lower-cost accounts payable. Our results further suggest that the impact of political connection on trade credit becomes weaker when firms locate in regions with an effective legal system. Further studies indicate that the lower credit reputation of connected firms stems from two channels: (1) they typically have a higher proportion of late payment of accounts payable but collect accounts receivable more quickly; (2) they are perceived as a special group protected by government and treated with regulatory favors, which creates more obstacles to the collection of trade credit through the legal system.