Counterparty Risk: Implications for Network Linkages and Asset Prices - Segal, Gill; Grigoris, Fotis; Hu, Yunzhi (Asset Pricing, Macro Finance, and Computation, 2020)
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.
Presented at SITE on July 16, 2020
Rights: This publication is open for research use. Copyright is retained by the author(s) or their heir(s).
Keywords: Conference papers and proceedings; Trade credit; Receivables; Asset pricing; Production network