Does trade credit financing matter for stock returns in times of crisis? Evidence from the COVID-19 stock market crisis

We examine the role of trade credit financing as a latent feature that becomes important during a crisis period, especially in the wake of the COVID-19 pandemic. Using a sample of 2,092 US firms, our findings support that shareholders pay additional attention to firmsModified Letter Turned Comma pre-crisis reliance on trade credit financing during a crisis period. While the prior literature document a positive relationship, we find evidence that trade credit financing is negatively related to stock market returns of US firms around the COVID-19-induced market crisis. This negative relationship is robust to several sensitivity tests and restricted to firms with: (1) financial constraints; (2) lower reliance on external financing; (3) higher short-term debt; and (4) higher labor intensity and labor adjustment costs. Trade credit financing contains information about firmsModified Letter Turned Comma possible financial constraints, external financing, short-term debt, and information asymmetry.