Uncertainty in banking and trade credit of firms

Abstract

This paper uses data from commercial banks and nonfinancial listed firms in Vietnam from 2007 to 2022 to address the effect of banking uncertainty on firms’ trade credit. We find that trade credit increases with heightened uncertainty in the banking sector, which is more conspicuous in nonstate-owned firms and when the macro economy experiences shocks, such as those caused by the global financial crisis and the COVID-19 pandemic. We also determine that banking uncertainty is associated with lower bank debt in firms, indicating a substitution effect between bank credit and trade credit when uncertainty rises. A further mechanism test shows that the uncertainty effect on trade credit works through strategic and financing motives. Finally, we find that trade credit expansion may hurt corporate performance; this effect is amplified during periods of banking uncertainty.