Institutional cross‐ownership and trade credit: Evidence from China

• Published date: 01 November 2023
• Author: Huan Liu,Canran Hou
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/corg.12505

ORIGINAL ARTICLE

Institutional cross-ownership and trade credit: Evidence from

China

Huan Liu

1

|Canran Hou

2

1

School of Business, Beijing Technology and

Business University, Beijing, China

2

School of Economics and Management,

Beijing University of Posts and

Telecommunications, Beijing, China

Correspondence

Canran Hou, School of Economics and

Management, Beijing University of Posts and

Telecommunications, NO.10 Xitucheng Road,

Haidian District, 100876, Beijing, China.

Email: houcanran@bupt.edu.cn

Funding information

National Natural Science Foundation of China

(NO. 71802009); Beijing Municipal Social

Science Foundation (NO. 19YJC039); R&D

Program of Beijing Municipal Education

Commission (NO. SM202210011011); and

Collaborative Innovation Centre for State-

owned Assets Administration of Beijing

Technology and Business University

(NO. GZGL2022010).

Abstract

Research Question/Issue: Relying on enhanced market power and improved infor-

mation environment associated with institutional cross-ownership, this paper exam-

ines the relation between institutional cross-ownership and trade credit in China.

Research Findings/Insights: Listed firms with cross-ownership can obtain more trade

credit. The main conclusion is robust when we consider endogeneity problems, alter-

native measures of institutional cross-ownership, and the effect of a financial crisis.

Further, we perform several tests to examine the influencing mechanisms, confirming

that the positive relation between institutional cross-ownership and trade credit is

more pronounced for listed firms in more competitive industries, or with poorer

information environment. Further analysis also finds that the positive effect of insti-

tutional cross-ownership on trade credit is more prominent for listed firms with

fewer bank loans.

Theoretical/Academic Implications: This paper emphasizes information sharing and

cooperation among listed firms with institutional cross-ownership and argues that

the information improvement effect is a relatively more important mechanism in

affecting listed firms' decisions.

Practitioner/Policy Implications: China's market-oriented reform is in progress and

shows some weaknesses in corporate governance and investor protection. The

research focusing on institutional cross-ownership can provide useful suggestions for

policy makers on how to improve corporate governance and construct efficient capi-

tal markets.

KEYWORDS

corporate governance, institutional cross-ownership, trade credit, product market competition,

information advantage

1|INTRODUCTION

Traditional corporate finance theory holds that a shareholder pursues

the objective of share value maximization in a competitive product

market, while institutional investors as the common shareholders of

many listed firms desire a policy of portfolio value maximization due

to externalities generated by cross-ownership (Hansen & Lott, 1996;

He, Huang, & Zhao, 2019). Therefore, previous studies based on

developed capital markets (e.g., the United States and the

United Kingdom) document that institutional cross-ownership not

only exerts a corporate governance effect on managers' behaviors but

also improves the information sharing and cooperation within listed

firms with common shareholders (Brooks et al., 2018; Edmans

et al., 2019; Harford et al., 2011; He, Huang, & Zhao, 2019;

Jung, 2013; Matvos & Ostrovsky, 2008; Park et al., 2019).

The market value of outstanding shares held by institutional

investors of Chinese A-shares reached 22.55 trillion CNY (approxi-

mately 3.22 trillion USD) in 2018, accounting for 64.07% of the total

Received: 24 April 2022Revised: 20 November 2022Accepted: 22 November 2022

DOI: 10.1111/corg.12505

Corp Govern Int Rev. 2023;31:845–868. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd.845

market value of outstanding A-shares according to Wind database.

Correspondingly, more than 93% of listed firms are held by at least

one institutional investor, and a listed firm is invested by 59 institu-

tions on average in 2018. Because of the increasingly important role

of institutional investors in China's capital markets, the discussion on

the economic consequences of institutional cross-ownership is cer-

tainly feasible and meaningful.

Trade credit provides short-term external financing for firms in

the supply chain and has aroused much attention in recent years

because of its increasing scale and common practice around the world

(Abdulla et al., 2020; Mateut & Chevapatrakul, 2018; Petersen &

Rajan, 1997). Unlike prior studies on China that discuss trade credit of

non-listed firms based on survey data (Chen et al., 2019; Cull

et al., 2009; Ge & Qiu, 2007), this paper sheds light on the effect of

institutional cross-ownership on trade credit based on China's publicly

listed firms, which is in line with recent research arguing that public

firms' trade credit policies show huge differences compared to pri-

vately held companies (Abdulla et al., 2017; Shang, 2020).

Based on the anticompetitive effect and the information improve-

ment effect of institutional cross-ownership (Azar et al., 2018;

Chemmanur et al., 2016; Park et al., 2019; Pawliczek &

Skinner, 2018), we believe that institutional cross-ownership can help

listed firms obtain more trade credit for the following reasons. First,

the anticompetitive effect of institutional cross-ownership can help

form strategic alliances by removing organizational barriers within

firms, which can provide the benefits of anticompetition to listed firms

with common institutional investors. Higher market power associated

with institutional cross-ownership is conducive to listed firms' trade

credit use. Second, institutional cross-ownership reduces concerns

about the proprietary cost of information disclosure and incentivizes

listed firms to disclose more information voluntarily. Better informa-

tion transparency facilitates information acquisition activities of trade

credit's providers, which is also beneficial for the expansion of trade

credit in the supply chain.

By collecting financial data of Chinese A-share listed firms from

2007 to 2017, we confirm that institutional cross-ownership is posi-

tively related to trade credit use, supporting the assumption that listed

firms with cross-ownership will obtain benefits depending on higher

market power and better information transparency. The main conclu-

sion is robust when we consider endogeneity concerns, alternative

measures of institutional cross-ownership, and the effect of a global

financial crisis.

The influence mechanism analyses are consistent with our

expectations. Empirical results conclude that the positive relation

between institutional cross-ownership and trade credit is more

pronounced for listed firms in more competitive industries or with

poorer information environment. Relative to the benefits of anticom-

petition, the improved information environment associated with insti-

tutional cross-ownership is more important in explaining the positive

relation. Further, we also examine the effect of other financing

sources and find that the positive effect of institutional cross-

ownership on trade credit is more prominent for listed firms with

fewer bank loans.

This paper contributes to the existing literature in several ways.

First, though prior research has confirmed the corporate governance

role and information advantage of institutional investors as the basis

of the rapid growth of Chinese capital markets (Cheng et al., 2016;

Jiang & Yuan, 2018; Zhang et al., 2017), few studies on China take

institutional cross-ownership into consideration. Building on portfolio

value maximization theory, we focus on information sharing and coop-

eration within listed firms and argue that institutional cross-ownership

removes informational and organizational barriers of firms with com-

mon blockholders, who do not only monitor managers' behaviors but

also affect listed firms' financing decisions.

Second, based on influencing mechanisms of institutional cross-

ownership, the existing literature discusses the impact of competitive

advantage and improved information environment on listed firms'

decisions (Chemmanur et al., 2016; He & Huang, 2017; Jung, 2013;

Pawliczek & Skinner, 2018), but few studies distinguish the relative

importance of different mechanisms. By constructing standardized

regressions, we confirm that the information improvement effect of

institutional cross-ownership is more important in affecting listed

firms' trade credit use, which provides deep insights into the benefits

of institutional cross-ownership and guides future research on this

topic.

The rest of this paper is as follows: Section 2lists institutional set-

tings, related literature, and hypothesis development. Section 3

describes the sample and empirical design, Section 4contains the

principal results and discussions, Section 5presents further analyses,

and Section 6concludes the paper.

2|INSTITUTIONAL SETTINGS, RELATED

LITERATURE, AND HYPOTHESIS

DEVELOPMENT

2.1 |Institutional settings

China banned capital markets in 1949 due to the requirements of a

government-planned economic model, which led to the lagging devel-

opment of a market-oriented economic model. Fortunately, the cen-

tral government of China formulated the policy of reform and opening

up and began to conduct economic reconstruction after the opening

of the Third Plenary Session of the 11th Central Committee of the

Communist Party of China (CPC) in 1978. With the advance of

market-oriented reform, capital markets reappeared in Shanghai and

Shenzhen in the early 1990s, which gave companies in China diversi-

fied choices to meet their capital needs. Chinese institutional inves-

tors were born along with the capital markets.

However, institutional investors could not fulfill their functions

until the promulgation of the Interim Measures for the Administration

of Securities Investment Funds in 1998. Then, the formation of the

Securities Analysts Association of China (SAAC) in 2000, the strategy

of Ultra-Conventional Development of Institutional Investors formu-

lated by the China Securities Regulatory Commission (CSRC) in 2000,

the entry into the World Trade Organization (WTO) in 2001, and the

846 LIU AND HOU