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Journal of Financial Economics Vol. 115 No. 3 2015

Trade credit and cross-country predictable firm returns

Rui Albuquerque1,2,3; Tarun Ramadorai2,4,5; Sumudu W. Watugala4,5,6

1 Universidade Católica Portuguesa · 2 Centre for Economic Policy Research · 3 European Corporate Governance Institute · 4 University of Oxford · 5 Science Oxford · 6 United States Department of the Treasury

Abstract

We investigate the role of trade credit links in generating cross-border return predictability between international firms. Using data from 43 countries from 1993 to 2009, we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable based on the returns of their associated customer countries. This behavior is especially prevalent among firms with high levels of foreign sales. To better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links. The model offers further predictions about this phenomenon, including stronger predictability during periods of high credit constraints and low uninformed trading volume. We find supportive empirical evidence for these predictions.

DOI
10.1016/j.jfineco.2014.10.007
Volume
115
Issue
3
Pages
592-613
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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