Doubtful Receivables' Risk and Its Impact on Stock Returns

ABSTRACT The current research proposes a previously unknown source of risk in relation to companies’ doubtful receivables. Higher relative doubtful receivables present a risk for companies' future cash flows. Hence, the article discusses an innovative risk measure associated with companies’ doubtful receivables. As the new measure increases, the expected stock returns increase as well. The analysis investigates the cross‐section of 222,818 firm‐year observations in the US. Both statistical and economic significance were revealed by the empirical outcomes. Moreover, multiple robustness tests—both in and out of sample—found the results to be significant. Both researchers and practitioners alike can benefit from the new analysis and its outcomes.