Trade Credit and Cross-Country Predictable Firm Returns

Albuquerque, Rui, Ramadorai, Tarun and Watugala, Sumudu (2015) Trade Credit and Cross-Country Predictable Firm Returns. Journal of Financial Economics, 115 (3). pp. 592-613.

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We investigate the role of trade credit links in generating cross-border return predictability between international firms. Using data from 42 countries from 1993 to 2009, we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable by the returns of their associated customer countries. This behavior is especially prevalent for firms with high levels of foreign sales, and is robust to a variety of controls. 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 has further predictions about this phenomenon, including stronger predictability during periods of high credit constraints and high uninformed trading volume. We find supportive empirical evidence for these results.

Item Type: Article
Keywords: trade credit, return predictability, supply chain, international firms, finance
Subject(s): Finance
Date Deposited: 11 Aug 2014 13:07
Last Modified: 29 Nov 2018 12:18

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