Review of Financial Studies Vol. 36 No. 2 2023
Counterparty Risk: Implications for Network Linkages and Asset Prices
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.
- DOI
- 10.1093/rfs/hhac044
- Volume
- 36
- Issue
- 2
- Pages
- 814-858
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref