Working Capital Management, Credit Risk, and Bondholder Wealth
41 Pages Posted: 15 Aug 2018 Last revised: 16 Apr 2019
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: Suggested Citation