Supplier Financing and Stock Price Crash Risk: Monitoring versus Concession?

54 Pages Posted: 1 May 2020

See all articles by Yangke Liu

Yangke Liu

Queen's Management School

Viet Anh Dang

Alliance Manchester Business School

Edward Lee

University of Manchester - Alliance Manchester Business School

Cheng (Colin) Zeng

University of Manchester

Date Written: August 2018

Abstract

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

Liu, Yangke and Dang, Viet Anh and Lee, Edward and Zeng, Cheng (Colin), Supplier Financing and Stock Price Crash Risk: Monitoring versus Concession? (August 2018). Available at SSRN: https://ssrn.com/abstract=3570499 or http://dx.doi.org/10.2139/ssrn.3570499

Yangke Liu

Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

Viet Anh Dang (Contact Author)

Alliance Manchester Business School ( email )

AMBS Crawford House
Booth Street West
Manchester, Greater Manchester M15 6PB
United Kingdom
+44(0)16127 50438 (Phone)

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Cheng (Colin) Zeng

University of Manchester

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