Working Capital Management, Credit Risk, and Bondholder Wealth

41 Pages Posted: 15 Aug 2018 Last revised: 16 Apr 2019

See all articles by Paul Hanouna

Paul Hanouna

Villanova University - School of Business

Robert L. Kieschnick

University of Texas at Dallas

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania

Date Written: November 20, 2018

Abstract

We examine the effects of changes in individual components of a firm’s working capital on its credit risk and bondholders’ wealth. We find evidence that both the changes and the volatility of changes in a firm’s working capital significantly affect its bondholders’ wealth. Specifically, we find that various components of a firm’s working capital have different influences on bond returns, in ways that reveal that the market conditions its assessment of these changes. Second, we find that the volatility of these changes influence variations in the firm’s credit default swap spreads. Taken together, these results highlight the influence of trade credits given and received as well as reverse trade credit on credit risk and the pricing of debt.

Keywords: bond returns, credit risk, cash, trade credit, inventories, supply chain financing, bankruptcy

JEL Classification: G12, G30

Suggested Citation

Hanouna, Paul E. and Kieschnick, Robert L. and Moussawi, Rabih, Working Capital Management, Credit Risk, and Bondholder Wealth (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3223026 or http://dx.doi.org/10.2139/ssrn.3223026

Paul E. Hanouna

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Robert L. Kieschnick (Contact Author)

University of Texas at Dallas ( email )

800 W. Campbell Rd, SM31
Richardson, TX 75080
United States
972-883-6273 (Phone)

HOME PAGE: http://www.utdallas.edu/~rkiesch/

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania ( email )

3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6301
United States

HOME PAGE: http://www.rabihmoussawi.com/

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