Trade Credit Risk Management: The Role of Executive Risk-taking Incentives

Journal of Business Finance and Accounting, Forthcoming

60 Pages Posted: 25 Jun 2014 Last revised: 5 Aug 2015

See all articles by Anna Rossi

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance

Date Written: July 29, 2015

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.

Keywords: Risk-taking incentives; Executive compensation; Trade credit

JEL Classification: J33; M52; G32

Suggested Citation

Rossi, Anna, Trade Credit Risk Management: The Role of Executive Risk-taking Incentives (July 29, 2015). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2458322 or http://dx.doi.org/10.2139/ssrn.2458322

Anna Rossi (Contact Author)

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland

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