Do Trade Creditors Possess Private Information? Evidence from Stock Returns

Abstract

Theories of customer–supplier relationships propose that the private information that suppliers have about buyers explains why trade credit arises in the presence of a competitive banking sector. However, there is limited evidence that trade creditors possess private information about the quality of buyers. Using a novel dataset of trade credit relationships, we find evidence consistent with suppliers possessing private information about buyers. The amount of trade credit that a supplier offers to a buyer and the ability of the buyer to pay back the trade credit on time are both positively associated with future buyer financial performance and solvency. Finally, increases in trade credit and the timeliness of payments are also associated with higher returns surrounding subsequent earnings announcements and lower volatility.