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Counterparty Risk: Implications for Network Linkages and Asset Prices

Author

Listed:
  • Fotis Grigoris
  • Yunzhi Hu
  • Gill Segal
  • Ralph Koijen

Abstract

We study the relation between trade credit, asset prices, and production-network linkages. Empirically, firms extending more trade credit earn 7.6 p.a. lower risk premiums and maintain longer relationships with customers. Using a production-based model, we quantitatively explain these novel facts. Trade credit reduces the departure probability of high-quality customers, thereby reducing firms’ exposures to systematic costs incurred in finding new customers. The mechanism predicts that the aggregate amount of trade credit proxies for customer-search costs and that suppliers with shorter-duration links to customers command higher expected returns. We confirm these and other novel predictions in the data.

Suggested Citation

  • Fotis Grigoris & Yunzhi Hu & Gill Segal & Ralph Koijen, 2023. "Counterparty Risk: Implications for Network Linkages and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 36(2), pages 814-858.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:2:p:814-858.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac044
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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