Counterparty risk: implications for network linkages and asset prices

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 fact...

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Veröffentlicht in:The Review of financial studies 2023-02, Vol.36 (2), p.814-858
1. Verfasser: Grigoris, Fotis
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhac044