Trade Credit and Cross-Country Predictable Firm Returns
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance; Centre for Economic Policy Research (CEPR)
Sumudu W. Watugala
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance
December 8, 2012
We investigate the role of trade credit links in generating cross-border return predictability between international firms. Using data from 42 countries from 1993 to 2009, we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable by the returns of their associated customer countries. This behavior is especially prevalent for firms with high levels of foreign sales, and is robust to a variety of controls. To better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links. The model has further predictions about this phenomenon, including stronger predictability during periods of high credit constraints and high uninformed trading volume. We find supportive empirical evidence for these results.
Number of Pages in PDF File: 49working papers series
Date posted: January 23, 2011 ; Last revised: January 31, 2013
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