Counterparty Risk: Implications for Network Linkages and Asset Prices

Fotis Grigoris, Yunzhi Hu, Gill Segal and Ralph Koijen

The Review of Financial Studies, 2023, vol. 36, issue 2, 814-858

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.

JEL-codes: D25 E23 E32 G12 L14 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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