Counterparty Risk: Implications for Network Linkages and Asset Prices

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Abstract/Contents

Abstract: This paper studies the relation between trade credit, risk, and the dynamics of production network linkages. We find that firms that extend more trade credit earn 7% p.a. lower risk premia, and maintain longer relationships with their customers. We also document that suppliers with longerduration links to their customers command lower expected returns. We quantitatively explain these facts using a production-based model. Trade credit helps to hedge customers against liquidity risks, thereby reducing suppliers’ exposures to costs incurred in finding new customers. Overall, trade credit is informative about the lifespan of supplier-customer links, the production network’s density, and macroeconomic risk.

Type of resource	text
Form	online resource
Extent	1 online resource
Place	Stanford (Calif.)
Publisher	Stanford Institute for Theoretical Economics
Publication date	2020
Language	English
Digital origin	born digital

Subject	Trade credit
Subject	Receivables
Subject	Asset pricing
Subject	Production network
Genre	Conference papers and proceedings

Note	Presented at SITE on July 16, 2020
Session series	Title Asset Pricing, Macro Finance, and Computation
Session	Organizer of meeting Judd, Kenneth Pohl, Walter Schmedders, Karl Wilms, Ole Abstract This session focuses on recent advances in asset pricing and macro finance as well as the use of computational techniques in these areas. Possible topics include but are not limited to the following: investor heterogeneity, learning and ambiguity, new preference structures for pricing models, or using machine learning to understand the cross-section of returns. As the analysis of such models often requires the use of computational methods, we encourage submissions that develop and make use of new numerical techniques.
Location	https://purl.stanford.edu/tj299mp4532
Repository	Stanford Institute for Theoretical Economics

Use and reproduction: This publication is open for research use. Copyright is retained by the author(s) or their heir(s).

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