Abstract
In this study we investigate how executive equity incentives affect companies’ risk-taking behavior in relationships with their customers. We hypothesize and find that executive risk-taking incentives provided by options are positively related to the degree of trade credit riskiness measured both as the amount of total trade credit a firm extends to all its customers and as the amount of trade credit a firm extends to customers with a high probability of default. We also find that the measures of trade credit riskiness are positively related to the firm’s future stock return volatility, suggesting that the customer default risk inherent in customer-supplier trade credit relationships represents an important economic source of the overall supplier-firm riskiness. The findings of the study provide insights into why firms facing financial difficulties are not denied trade credit.
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