Employee protection and trade credit: Learning from China's social insurance law

• Published in: Economic modelling 2023-10, Vol.127, p.106486, Article 106486
• Main Authors: Gao, Yihong, Gao, Jiayan
• Format: Article
• Language: English
• Subjects: Difference-in-Differences; Employee protection; Social insurance law; Trade credit
• ISSN: 0264-9993
• DOI: 10.1016/j.econmod.2023.106486

This paper investigates the impact of employee protection on trade credit on the basis of the implementation of China's “Social Insurance Law”. The relationship between trade credit and employee protection by social insurance regulations has not been thoroughly investigated. Hence, to explore the impact of employee protection on the trade credit redistribution, we adopt a difference-in-differences model that is based on the implementation of China's 2011 Social Insurance Law. We find a negative effect of employee protection on trade credit redistribution based on the data of listed firms in China from 2007 to 2015, which is motivated by growing performance pressure and cash holdings. Moreover, the negative effect is more pronounced in SOEs and in firms that face stricter local law enforcement, greater financial constraints, and higher financial costs. Our study sheds light on the real effect of employee protection and the factors influencing trade credit redistribution, expanding the prior literature. •We demonstrate that the implementation of SIL inhibits trade credit redistribution.•Decreasing operating profits and increasing cash holdings are the main mechanism.•The impact is pronounced in SOEs and firms with stricter local law enforcement.•The impact is pronounced in firms with higher financial constraints and costs.