Trade Credit and Stock Return Predictability: Evidence from Pakistan

Trade credit transfers private information about borrower�s creditworthiness and future performance to other lenders and this information can also be translated into the stock market. The purpose of this study is to analyze the informational role of trade credit in predicting future stock returns of the firms in the context of Pakistan. After controlling for market and firm-specific characteristics in our proposed five-factor model, it is found that firms depending more on trade credit as compared to bank loans have higher future stock returns. These findings suggest that trade credit supply signals the information that the supplier has about the borrower and this information is gradually and positively translated in the market Keywords: Trade Credit, Stock return Predictability, Fama & French Three-Factor Model