Trade credit financing and stock price crash risk. (21st August 2017)

• Record Type: Journal Article
• Authors: Cao, Feng; Ye, Kangtao; Zhang, Ning; Li, Sifei
• Is Part Of: Journal of international financial management & accounting. Volume 29:Number 1(2018)
• Page Start: 30
• Page End: 56
• Publication Date: 2017-08-21
• Subjects: stock price crash risk -- trade credit; International business enterprises -- Finance -- Periodicals; International finance -- Periodicals; Managerial accounting -- Periodicals; Electronic journals; 658.15
• DOI: 10.1111/jifm.12067
• Languages: English
• ISSNs: 0954-1314

Abstract

Abstract: This study investigates the association between trade credit financing and stock price crash risk within China's context. We find that firms using more trade credit financing have significantly lower future stock price crash risk. This negative association is more pronounced for firms with greater information asymmetry and for firms located in less developed financial markets. This finding is robust to the endogeneity concern, alternative measures of stock price crash risk, and the inclusion of other factors identified in prior studies that might affect stock price crash risk. Further evidence suggests that both the monitoring mechanism and the disclosure mechanism drive the documented relation. Our study suggests that access to trade credit can significantly reduce the likelihood of crash risk in a country like China with less developed formal bank financing. Our study also suggests that investors can effectively avoid stock price crash risk by using the trade credit information disclosed in financial statements.