Working Paper: CEPR ID: DP8222
Authors: Rui Albuquerque; Tarun Ramadorai; Sumudu Watugala
Abstract: We examine trade credit links between firms as a channel of international return comovement. We model firms in different countries connected by trade credit links in segmented stock markets with asymmetrically informed investors. The model predicts that the cross-serial correlation of country stock returns increases as trade credit increases. Using data from 42 countries from 1993 to 2009, we find evidence consistent with the model. Stock returns of high trade credit firms in exporting countries are predicted by the returns of the countries that consume this output. A model-implied cross-country long-short portfolio strategy yields 12-15 percent annualized, after risk adjustment.
Keywords: Asymmetric Information; International Stock Return Comovement; Rebalancing Trades; Trade Credit
JEL Codes: F30; F36; F37; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade credit (F19) | higher cross-serial correlation of stock returns (C10) |
| trade credit links (F19) | transmitting local financial shocks (F65) |
| trade credit (F19) | predictable stock returns (G17) |
| returns of high trade credit firms in exporting countries (F14) | predicted by returns of consumer countries (F17) |
| cross-sectional variation in trade credit (F14) | predictable performance of producer countries' stock indices (Q47) |
| trade credit (F19) | return comovement (C10) |
| high financial stress in emerging markets (F65) | returns from trading strategy (G17) |