Bing Xu (Bank of Spain) - Collateral and the disruption of firms as non-financial intermediaries: Evidence from Chinese Property Law
By allowing large classes of movable assets to be used as collateral, the Chinese Property Law reform transformed firms’ role as non-financial intermediaries. We find after the legal reform, firms relied on trade credit financing substituted to more short-term bank credit, and the providers of trade credit reduced significantly their provision of trade credit. In particular, the Property Law has disrupted the practice in which firms redistribute short-term bank credit via trade credit. Instead, the providers of trade credit started to accumulate more fixed asset investment, which in turn allowed for more long-term borrowing from banks. Our findings are not driven by confounding factors such as liquidity drain due to financial crisis or other contemporary reforms. This study highlights the importance of looking at credit transactions between firms when investigating the effect of collateral laws.
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