Work

Counterparty Risk: Implications for Network Linkages and Asset Prices

Year: 2022

Type: article

Abstract: We study the relation between trade credit, asset prices, and production-network linkages. Empirically, firms extending more trade credit earn 7.6$\%$ p.a. lower risk premiums and maintain longer relationships with customers. Using a production-based model, we quantitatively explain these novel facts. Trade credit reduces the departure probability of high-quality customers, thereby reducing firms’ exposures to systematic costs incurred in finding new customers. The mechanism predicts that the aggregate amount of trade credit proxies for customer-search costs and that suppliers with shorter-duration links to customers command higher expected returns. We confirm these and other novel predictions in the data.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhac044

Authors: Fotis Grigoris, Yunzhi Hu, Gill Segal

Institutions: Indiana University, University of North Carolina at Chapel Hill

Language: English

Topic: Working Capital and Financial Performance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W4286561734

FWCI: 9.097

Cites: 65

Cited by: 34

Related to: 10