Supply chain finance and the speed of corporate leverage adjustment: Evidence from Chinese listed firms

Abstract

Dynamic trade-off theory predicts that firms move gradually toward a target leverage ratio because adjustment is costly, and information asymmetry and financing frictions are among the sources of those costs. Supply chain finance (SCF) may lower these costs by drawing on transaction level information within supply chains. This paper examines whether SCF changes the speed at which firms close the gap between actual and target leverage, using a two-stage partial adjustment model and a panel of 28,180 firm-year observations of Chinese A share listed firms from 2010 to 2025 (23,682 in the regressions with controls). The interaction between SCF and the deviation from target leverage is positive and significant, indicating faster adjustment among firms with higher SCF. The result holds in instrumental variable and system GMM estimations, with alternative SCF measures and after excluding 2020 to 2022. The effect is asymmetric: SCF is associated with faster adjustment among overleveraged firms and slower adjustment among underleveraged firms, which points to a deleveraging role. The association is stronger for non state owned firms and for firms in eastern and central China, and it is not significant in the western region. Because SCF is proxied by balance sheet items that overlap with leverage and the transmission mechanisms are not tested, the results should be read as associations. The study contributes to research on the determinants of leverage adjustment and on the economic consequences of SCF.