Competitive Neutrality and Non-State-Owned Enterprises' Access to Debt Financing:A Quasi-Natural Experiment during the COVID-19 Pandemic
LV Huaili, WANG Wenming, YAN Ziqiao, HOU Liang
School of Management, Shanghai University; School of Management, Zhejiang University; School of Accounting, Shanghai University of International Business and Economics
Summary:
Competitive neutrality involves maintaining a level playing field for competition between public (SOE) and private (non-SOE) enterprises, such that they follow the same rules when competing for business. However, in China commercial banks are the principal players in the credit market, and they commonly practice credit discrimination when they implement financial policies, which is a deviation from competitive neutrality. As such, prior research clearly recognizes that in comparison to SOEs, non-SOEs are at a substantial disadvantage when accessing the credit market. In response to COVID-19 shock, China introduced a series of financial policies to provide increased monetary and credit support to real sectors, especially to non-SOEs. Thus, we explore whether and how such financial policies affect competitive neutrality following the spread of the COVID-19 pandemic, which represents a unique exogenous experimental scenario. We use a sample of medium-term notes and commercial papers issued around the time of the outbreak of the COVID-19 pandemic to conduct difference-in-differences tests of the realization of competitive neutrality via financial policy. We find that compared with SOEs, non-SOEs experience a significantly larger reduction in the costs of debt financing during the pandemic period, which suggests that government intervention leads to improved competitive neutrality. Our analyses also show that the reduction in debt-financing costs for non-SOEs is proportional to the amount of trade credit they provide to their partners along the supply chain. Thus, the supply of trade credit by key non-SOEs to other non-SOEs along the supply chain reduces the COVID-19 pandemic-generated financial constraints on these other non-SOEs, thereby serving as an important mechanism to promote the realization of financial policy that ensures competitive neutrality. Furthermore, we find that the supportive financial policies implemented during the pandemic period reduce non-SOEs' level of financialization and improve their efficiency of fund utilization. Our study makes several contributions. First, it explores an important approach to achieving competitive neutrality via financial policy. Our findings indicate that the credit discrimination against non-SOEs that previous studies document results not from the financial policies themselves, but from commercial banks' partial implementation of these financial policies. These findings highlight better ways to realize competitive neutrality via financial policy. Second, our study contributes to research on credit discrimination and ownership discrimination. Our findings suggest that the financial policies promulgated by the central bank and other institutes effectively improve the financing environment for non-SOEs during the pandemic period, and the resultant financial support to non-SOEs does not result in resource misallocation or the inefficient use of raised funds. In fact, the improved financing environment for non-SOEs significantly alleviates the credit and ownership discrimination that they usually experience in the debt market. Third, our study enriches understanding of the complementary relationship between commercial credit and bank debt. We find that a non-SOE’s financial support of its non-SOE trade partners along the supply chain serves as a positive signal, which increases the probability that these trade partners will obtain loans from commercial banks on favorable terms in the event of extreme shocks. Fourth, our study provides insights into the financial risks embedded within the financial system, which should be monitored by regulators. For example, although the supply of commercial credit may enable non-SOE trading partners along the entire supply chain to obtain financial support and assist financial institutions in implementing policies to ensure competitive neutrality and maintaining controllable levels of credit risks, there is also a risk that this supply may generate contagious financial distress. That is, if non-SOEs in the supply chain default on their loans or declare bankruptcy, this may have a spillover effect on the entire supply chain, leading in extreme cases to financial crisis.
Biais, B. and C. Gollier, 1997, “Trade Credit and Credit Rationing”, The Review of Financial Studies, 10(4): 903～937.
[26]
Burkart, M. and T. Ellingsen, 2004, “In-kind finance: a Theory of Trade Credit”, The American Economic Review, 94(3): 569～590.
[27]
Carbo-Valverde, S., F. Rodriguez-Fernandez and G. F. Udell, 2016, “Trade Credit, the Financial Crisis, and SME Access to Finance”, Journal of Money, Credit and Banking, 48(1): 113～143.
[28]
Casey, E. and C. M. O'Toole, 2014, “Bank Lending Constraints, Trade Credit and Alternative Financing during the Financial Crisis: Evidence from European SMEs”, Journal of Corporate Finance, 27: 173～193.
[29]
Chen, S., H. Ma and Q. Wu, 2019, “Bank Credit and Trade Credit: Evidence from Natural Experiments”, Journal of Banking and Finance, 108, 105616.
[30]
Collin-Dufresn, P., R. S. Goldstein and J. S. Martin, 2001, “The Determinants of Credit Spread Changes”, The Journal of Finance, 56(6): 2177～2207.
[31]
Coulibaly, B., H. Sapriza and A. Zlate, 2013, “Financial Frictions, trade Credit, and the 2008-2009 global financial crisis”, International Review of Economics & Finance, 26(25): 25～38.
[32]
Fauver, L., M. Hung, X. Li and A. G. Taboada, 2017, “Board Reforms and Firm Value: Worldwide Evidence”, Journal of Financial Economics, 125(1):120～142.
[33]
Ge, Y and J. Qiu, 2007, “Financial Development, Bank Discrimination and Trade Credit”, Journal of Banking & Finance, 31(2): 513～530.
[34]
Gopalan, R., A. Mukherjee and M. Singh, 2016, “Do Debt Contract Enforcement Costs Affect Financing and Asset Structure”, Review of Financial Studies, 29(10):2774～2813.
[35]
Lown, C. S. and D. P. Morgan, 2002, “Credit Effects in the Monetary Mechanism”, FRBNY Economic Policy Review, 5, 217～235.
[36]
Mateut, S., 2014, “Reverse trade credit or default risk？ Explaining the use of Prepayments by Firms”, Journal of Corporate Finance, 29: 303～326.
[37]
McGuinness, G., T. Hogan and R. Powell, 2018, “European Trade Credit use and SME survival”, Journal of Corporate Finance, 49: 81～103.
[38]
Nilsen, J. H., 2002, “Trade Credit and the Bank Lending Channel”, Journal of Money, Credit and Banking, 34: 226～253.
[39]
OECD, 2012, Competitive Neutrality: Maintaining a Level Playing Field between Public and private business, Published by OECD.
[40]
Tsuruta, D., 2015, “Bank loan Availability and Trade Credit for Small Businesses during the Financial crisis”, The Quarterly Review of Economics and Finance, 55: 40～52.
