Government contracts drive corporate trade credit growth through enhanced financial access and scale

Background and Motivation

Government procurement is a major lever in public policy, affecting the behaviour and strategies of firms across various industries. Despite its growing significance in China’s economy, the impact of government contract awards on corporate financial practices—especially trade credit policies—remains underexplored. This study aims to fill this gap by investigating how government procurement shapes companies’ trade credit decisions and the mechanisms behind these changes.

Methodology and Scope

The research draws on extensive data covering government procurement contracts awarded to Chinese listed firms from 2015 to 2022. Using a two-way fixed effects econometric model, the analysis isolates the effects of procurement contracts on trade credit strategies. To ensure robustness, the study implements a range of advanced tests, including instrumental variable estimation, Heckman correction, propensity score matching (PSM), and placebo tests.

Key Findings and Contributions

The study reveals that winning government procurement contracts significantly increases firms’ willingness to provide trade credit to their customers, largely due to greater access to bank loans, enhanced government subsidies, and production expansion. Notably, this effect is strongest for contracts from local or city governments where the firm is headquartered, rather than central government contracts. On the demand side, government procurement reduces the need for trade credit, particularly among customers. Crucially, the research identifies two transmission channels—government credit endorsement and scale economy effects—through which procurement contracts influence corporate trade credit supply.

Why It Matters

As governments increase their procurement activities, understanding the broader financial ripple effects on corporate behaviour is essential for policymakers, corporate leaders, and financial analysts. This study not only sheds light on a new determinant of trade credit supply but also demonstrates the far-reaching institutional signalling power of government contracts within the private sector.

Practical Applications

Policymakers can use these findings to better design procurement strategies that foster healthy financial ecosystems and support corporate growth. For businesses, securing government contracts can serve as a powerful tool to boost creditworthiness, attract bank financing, and expand operational capacity. Financial institutions can also use these insights to more accurately assess the risk and credit profiles of firms engaged in government procurement.

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original!