Supplier Financing and Stock Price Crash Risk: Monitoring versus Concession?
54 Pages Posted: 1 May 2020
Date Written: August 2018
Supplier financing, or trade credit, is an increasingly important source of financing for a company. This paper tests two alternative views on the relation between trade credit and future stock price crash risk: monitoring and concession. We present robust evidence that supplier financing is negatively associated with stock price crash risk, consistent with the former view that suppliers can effectively monitor buyers through the provision of trade credit and therefore constrain their bad-news-hoarding behavior. Further analyses reveal that the role of trade credit in mitigating stock price crash risk is more pronounced among buyers with weaker market power and those that require more monitoring, such as firms with higher distress risk or weaker governance due to limited monitoring by institutional investors and banks. Overall, our results shed light on how trade credit shapes managers’ disclosure incentives and firms’ extreme negative stock returns.
Keywords: Trade credit, Supplier financing, Crash risk, Monitoring, Bad news hoarding
JEL Classification: G3, G12, G14
Suggested Citation: Suggested Citation