Abstract

We propose that local corruption distorts the allocation of government-controlled resources and impairs the contract environment, thereby reducing firms’ use or suppliers’ provision of trade credit. We use a sample of Chinese-listed firms from 2007 to 2020 to examine the role of local corruption in firms’ access to trade credit and find that the level of local corruption is negatively related to firms’ trade credit use. This effect is more pronounced in firms with weak (vs. strong) internal governance, slack (tight) external monitoring and high (low) supplier concentration. The results of path analysis show that local corruption extends short-term bank loans as well as government subsidies and impairs firms’ accounting quality, thereby inhibiting firms’ demand for or suppliers’ provision of trade credit. Moreover, the post-2012 anti-corruption campaign in China plays a significant role in correcting the misallocation of trade credit caused by corruption. The results of this study illuminate the negative external effects of local corruption on trade credit.