The Asymmetric Effects of Business Cycle of Trade Credit on Reducing SMEs' Credit Constraints

Based on a large sample of Chinese industrial enterprises, this paper applied the improved Euler equation to construct an econometric model, and restrict our sample within a rising cycle from 2004 to 2007 and a down cycle from 2008 to 2009. Our empirical results suggest that the asymmetric effects of business cycle are the main factors that influence the supply of trade credit, by changing firms' production and operation under different economic cycles. Meanwhile, the anti-risk ability varies significantly among SMEs, particularly in the down cycle. Since companies suffer from the "double restriction" of unbalanced credit rationing and reduced trade credit, the effect of trade credit for small enterprises on reducing credit constraints is smaller than medium-sized. enterprises. Thus we need to deepen financial development, introduce new financing instruments, and use multiple measures to reduce the credit constraints for SMEs.