Government procurement and trade credit provision: evidence from China

Purpose This study mainly investigates two pivotal questions: (1) How does the acquisition of government procurement contracts influence corporate strategies in trade credit provision? (2) What underlying mechanisms drive the observed changes in trade credit policies following government contract awards? Design/methodology/approach This study employs comprehensive data pertaining to government procurement contracts granted to China’s listed companies spanning from 2015 to 2022, utilizing a two-way fixed effects model to perform the econometric analyses. A battery of robustness tests, including instrumental variable (IV) estimation, Heckman two-stage correction, propensity score matching (PSM), and placebo tests, has been systematically implemented to validate the reliability of our baseline findings. Findings Government procurement contracts augment firms’ provision of trade credit to their customers rather than to their suppliers. This outcome is attributed to the fact that firms securing government contracts can access increased bank loans and government subsidies, and expand their production scale. Furthermore, the primary drivers of the effects above are procurement contracts from the city government where the firm is headquartered, as well as contracts awarded by local governments rather than those from the central government. On the demand side, government procurement reduces enterprises’ trade credit demand, primarily that from their customers. Originality/value This study pioneers the revelation of government procurement as an “institutional signal”, whose dual transmission channels enhance corporate trade credit supply: the governmental credit endorsement effect and the scale economy effect. Thus, it contributes to the literature on determinants of trade credit financing and on the effects of government procurement contracts.