Supplier Financing and Stock Price Crash Risk: Monitoring versus Concession?

Viet Dang, Edward Lee, Yangke Liu, Cheng Zeng

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

Supplier financing, or trade credit, is an increasingly important source of financing for a company. This paper tests two alternative views on the relation between trade credit and future stock price crash risk: monitoring and concession. We present robust evidence that supplier financing is negatively associated with stock price crash risk, consistent with the former view that suppliers can effectively monitor buyers through the provision of trade credit and therefore constrain their bad-news-hoarding behavior. Further analyses reveal that the role of trade credit in mitigating stock price crash risk is more pronounced among buyers with weaker market power and those that require more monitoring, such as firms with higher distress risk or weaker governance due to limited monitoring by institutional investors and banks. Overall, our results shed light on how trade credit shapes managers’ disclosure incentives and firms’ extreme negative stock returns.
Original languageEnglish
Title of host publicationEFMA2018 Milan
Number of pages54
Publication statusIn preparation - 01 Sep 2021

Keywords

  • Supplier financing
  • Crash risk
  • Monitoring
  • Bad news hoarding

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