Theories of customer supplier relationships hold that the private information of suppliers about buyers explains the use of trade credit even when there is a competitive banking sector. If suppliers possess private information about their buyers, then the buyer's order size and ability to pay on time should reflect that information. Using a novel dataset of trade credit relationships, we test whether suppliers have private information about their buyers. Consistent with suppliers possessing private information, we find that the amount of trade credit that a supplier offers to a buyer and the ability of the buyer to pay the trade credit on time are both associated with future buyer abnormal stock returns.
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