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There exists extensive literature on trade credit as secondary source of financing,
but few studies have found that how financial development change the preference
of trade credit financing specifically in high corruption environment. The
objective of this study is to examines this relationship because substitution theory
vows that trade credit assists the firms to mitigates the challenges of low financial
development. Ten years data ranging from 2007 to 2016 of non-financial sector
firms from three countries (Pakistan, China, and India) were used and GMM
(generalized method of moments) fixed effect model employed for regressing
analysis. Results first reveal that if a country has low financial development,
companies can arrange their financing needs through secondary source of
financing i.e. trade credit. Trade credit is an alternative source of financing during
low financial development. It then suggests that high corruption hampers the
option of trade credit financing as it creates the more uncertainty for business. In
high corruption situation, companies use more bank financing. But this effect
become positive when corruption interacts with financial development and
collectively effect the trade credit. High corruption and high financial
development mitigate each other effect and thus companies go towards more trade
credit financing. Overall, evidence suggests that the trade credit is a substitute
source of low financial development. Corporate managers can reduce the
probability of adverse effects of low financial development by utilizing the more
financing through trade credit.
Jaleel Ahmed, Umar Farooq. (2020) Financial Development and Trade Credit: Moderating Role of Corruption, City University Research Journal, Volume 10, Issue 3.
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