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Trade Credit and Cross-Country Predictable Firm Returns

46 Pages Posted: 23 Jan 2011 Last revised: 20 Aug 2015

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 7, 2014

Abstract

We investigate the role of trade credit links in generating cross-border return predictability between international firms. Using data from 43 countries from 1993 to 2009, we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable based on the returns of their associated customer countries. This behavior is especially prevalent among firms with high levels of foreign sales. 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 offers further predictions about this phenomenon, including stronger predictability during periods of high credit constraints and low uninformed trading volume. We find supportive empirical evidence for these predictions.

Keywords: international equity markets, trade credit, information asymmetry, customer-supplier relations, predictability

JEL Classification: G12, G14, G15

Suggested Citation

Albuquerque, Rui A. and Ramadorai, Tarun and Watugala, Sumudu W., Trade Credit and Cross-Country Predictable Firm Returns (July 7, 2014). Journal of Financial Economics Vol. 115, 592-613, 2015.. Available at SSRN: https://ssrn.com/abstract=1743084 or http://dx.doi.org/10.2139/ssrn.1743084

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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