Social Credit Reform and Trade Credit : Quasi-Natural Experimental Evidence from China

This paper explores the effect of China’s staggered rollout of social credit reform (hereafter “the reform”), designed to improve credit information and credit market efficiency, on firm-level trade credit financing. The reform improves firms’ access to trade credit financing in treatment cities, and the results are robust to a battery of robustness tests. The effect is more pronounced for private firms without political connections, small firms, those located in regions with weak formal institutions, and when key suppliers are geographically distant. Plausible channels though which reform improves trade credit financing include reduced default risk and better information quality. However, improved buyers’ bargaining power and bank credit are unlikely to alternative channels. The increased access to trade credit improves firm performance as measured by return on equity (ROE) and Tobin’s Q. Overall, this paper highlights the importance of improving credit information and credit market efficiency in facilitating firms’ access to informal financing