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The Interaction Between Suppliers and Fraudulent Customer Firms: Evidence from Trade Credit Financing of Chinese Listed Firms

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Abstract

This study investigates the interaction between suppliers and fraudulent customer firms from the perspective of reputation damage and reputation recovery. Specifically, reputation damage from the regulatory penalty for corporate fraud induces the trust crisis and suppliers respond to fraudulent firms by reducing the trade credit supply. To repair a damaged reputation and rebuild the trust, fraudulent firms raise the ratio of prepayment to purchase volume when purchasing from small suppliers and increase the proportion of purchase from large suppliers in the next year. Channel analysis shows that the declining trust is one of potential mechanisms to reduce the trade credit. Furthermore, the negative effect is more pronounced for fraudulent firms with non-related party suppliers, higher supplier concentration, less analyst coverage, and for fraudulent firms located in regions with less-developed financial environment. Additionally, supplier sanctions have a spillover effect on non-fraudulent customer firms in the same industry. The conclusions are robust to a series of checks, including PSM–DiD, firm and year fixed effect, the alternative measure for trade credit financing, the industry-year fixed effect and the consideration of the monetary policy and financial crisis.

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Notes

  1. Product market reaction refers to customer (suppliers) firms’ reaction to their fraudulent supplier (customer) firms.

  2. According to the definition, we use the phrase “corporate fraud” or “financial misconduct” to express the same meaning.

  3. The official securities regulators in China include China Securities Regulatory Commission (CSRC), Shanghai and Shenzhen Stock Exchange (SHSE and SZSE), and provincial securities regulatory bureau. SHSE and SZSE are under the ultimate authority of the CSRC.

  4. The Securities Law, promulgated in December 1998, clearly stipulates the role of CSRC as the main supervisory organization of the securities markets.

  5. http://www.csrc.gov.cn/pub/newsite.

  6. In this case, the CSRC will only give an internal warning to the firm.

  7. We sincerely thank the referee for the suggestion on modifying the hypothesis by adding the trust theory in this section.

  8. SHSE and SZSE are under the ultimate authority of the CSRC and they are delegated powers to regulate firms under their jurisdiction (Chen et al., 2005).

  9. Here we match the probability of committing fraud and being detected by securities authority by eight variables mentioned above, according to prior research (Conyon & He, 2016; Khanna et al., 2015).

  10. We sincerely thank the referee for the suggestion on employing PSM–DiD method in this section.

  11. We sincerely thank the referee for the suggestion on the related party relationship between suppliers and customer firms in this section. In addition, we rerun the tests using the sample of non-related party suppliers and related party suppliers, respectively. And consistent with our prediction, the regression result becomes more pronounced using the sample of firms with non-related suppliers.

  12. Financial environment reflects the regional financial development level. The higher the regional financial development level, the better the local financial environment.

  13. http://www.chinatax.gov.cn.

  14. The STA generally deducts 11 points for external events.

  15. We sincerely thank the referee for the suggestion on examining the mediating effect of trust in this section.

  16. We sincerely thank the referee for the suggestion on differentiating the supplier types when examining the reputation recovery strategy in this section.

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Appendix

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See Table 15.

Table 15 Variable definitions

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Wu, S., Gong, G., Huang, X. et al. The Interaction Between Suppliers and Fraudulent Customer Firms: Evidence from Trade Credit Financing of Chinese Listed Firms. J Bus Ethics 179, 531–550 (2022). https://doi.org/10.1007/s10551-021-04832-1

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