As told by the supplier: Trade credit and the cross section of stock returns |
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| Institution: | 1. University of Nottingham, Business School, Jubilee Campus, Nottingham, NG8 1BB, UK;2. School of Economics, University of Nottingham, University Park, Nottingham, NG7 2RD, UK;3. Sorbonne Graduate Business School and GREGOR Research Centre, University Paris 1, France;1. DCU Business School, Dublin, Ireland;2. UCD Smurfit Graduate Business School, Dublin, Ireland;1. Campus Saint-Jean, University of Alberta, Edmonton, AB T6C 4G9, Canada;2. Nottingham University Business School (NUBS) China, 199 Taikangdong Road, Ningbo, Zhejiang 315100, China;1. University of Bahrain, POB 32038, Sakheer, Bahrain;2. Alliance Manchester Business School, University of Manchester, Manchester M15 6PB, UK |
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| Abstract: | With superior information about their customers’ prospects, suppliers extend trade credit to capture future profitable business. We show that this information advantage generates significant return predictability. After controlling for major firm characteristics, firms that rely more on trade credit relative to debt financing have higher subsequent stock returns. The return predictability by trade credit is stronger among firms with lower borrowing capacity or profitability, and is more significant for firms with a higher degree of information asymmetry. Our findings suggest that trade credit extension reveals suppliers’ information that diffuses gradually across the investing public. |
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| Keywords: | Trade credit Return predictability Information diffusion |
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