Counterparty Risk: Implications for Network Linkages and Asset Prices
We study the relation between trade credit, asset prices, and production-network linkages. Empirically, firms extending more trade credit earn 7.6% p.a. lower risk premiums and maintain longer relationships with customers. Using a production-based model, we quantitatively explain these novel facts. Trade credit reduces the departure probability of high-quality customers, thereby reducing firms’ exposures to systematic costs incurred in finding new customers. The mechanism predicts that the aggregate amount of trade credit proxies for customer-search costs and that suppliers with shorter-duration links to customers command higher expected returns. We confirm these and other novel predictions in the data.
Authors
- Yunzhi Hu (ORCID: https://orcid.org/0000-0002-4136-771X)
- Fotis Grigoris (ORCID: https://orcid.org/0000-0001-5177-1620)
- Gill Segal (ORCID: https://orcid.org/0000-0001-5437-9886)
Institutions
- University of North Carolina at Chapel Hill (US)
Publication Details
- Journal
- UNC Libraries
- Published
- 2026-10-27
- DOI
- https://doi.org/10.17615/n5rv-zh43
- Primary Topic
- Working Capital and Financial Performance
- Type
- article
- Field-Weighted Citation Impact
- 0.00