Do Trade Creditors Possess Private Information? Stock Returns Evidence

42 Pages Posted: 19 Feb 2019 Last revised: 3 Jul 2022

See all articles by David A. Hirshleifer

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Yifan Li

San Francisco State University

Ben Lourie

University of California, Irvine

Thomas Ruchti

Government of the United States of America - Office of Financial Research

Date Written: February 2019

Abstract

Payment timeliness in trade credit transactions is a key metric suppliers use to monitor their buyers. However, firms are not required to disclose payment timeliness information. In theory, late payments could be either a positive or negative indicator of future performance. We find that late payment by buyers is negatively associated with future buyer financial performance and positively associated with subsequent default risk. This suggests that late payments are an indicator of inability to pay on time rather than an indicator that firms are delaying payments to fund profitable investments. The predictive power of payment timeliness for fundamentals is stronger for low liquidity and distressed firms. Finally, we find a significant association between payment timeliness and future stock returns, suggesting that investors do not fully incorporate payment timeliness information. Our evidence regarding the informativeness of payment timeliness is relevant for the ongoing regulatory debate on whether firms should disclose payment timeliness.

Suggested Citation

Hirshleifer, David A. and Li, Yifan and Lourie, Ben and Ruchti, Thomas, Do Trade Creditors Possess Private Information? Stock Returns Evidence (February 2019). NBER Working Paper No. w25553, Available at SSRN: https://ssrn.com/abstract=3336504

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yifan Li

San Francisco State University

United States

Ben Lourie

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States

Thomas Ruchti

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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