How Will Enterprises in ASIA Respond to The Implementation of BASEL II Regulations?

This study examines the impact of Basel II bank capital regulations on the use of trade credit by firms with different levels of credit risk in the Asian region. Using panel data from 1,295 firms across 17 Asian countries during the period 2004-2015, the study employs the System GMM (SGMM) method to test the hypothesis that firms with higher credit risk (rated BB- and below) exhibit greater reliance on trade credit in the post-Basel II period compared to firms with lower credit risk (rated BB- to AAA). The findings show that after the implementation of Basel II, high-risk firms increased their accounts payable to total assets ratio by 11.19% to 33.09% and decreased their accounts receivable to total assets ratio by 3.90% to 7.98% relative to lower-risk firms. The study provides the first empirical evidence on the role of trade credit as an important alternative financing source when Asian firms face bank credit supply shocks due to changes in bank capital regulations.