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Trade credit financing and stock price crash risk
Author(s) -
Cao Feng,
Ye Kangtao,
Zhang Ning,
Li Sifei
Publication year - 2018
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/jifm.12067
Subject(s) - endogeneity , trade credit , business , stock (firearms) , information asymmetry , finance , stock price , monetary economics , financial system , economics , econometrics , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology
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.