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Vertical propagation of default risk along the supply chain

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Abstract

This study investigates the propagation of default risk along the supply chain. We adopt a modified version of the firm-specific upstreamness measure from Gofman et al. (Rev Financ Stud 33:5856–5905, 2020) to assess each firm's vertical distance to the final consumption products in the supply chain. We find that upstream firms are more exposed to default risk, and the upstream effect is more substantial for firms that belong to less prominent, more leveraged, and less diverse supply chains. We also find that a distressed firm only affects its upstream suppliers but not its downstream customers. Our results are robust across various empirical specifications.

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Notes

  1. We would like to thank the anonymous referee for pointing out the need for further clarification on this matter.

  2. For example, Lang and Stulz (1992) find that the negative announcement return of portfolio on the competitors of bankrupt firms is more significant for highly levered industries. Itzkowitz (2015) argues that the ratio of investment to cash sensitivity is lower for firms with principal buyers, who act as monitors. The effect is especially strong for financially distressed suppliers. Lian (2017) finds that the financial contagion of distress from customer to supplier is stronger for customers who are more likely to default in the future. Kumar et al. (2021) find that distress propagation is related to the network structure by investigating 140,000 firms.

  3. https://www.supplychaindive.com/press-release/20220330-riskmethods-survey-reveals-supply-chain-disruption-is-costing-many-business/, assessed on 2024/01/16.

  4. https://www.aon.com/en/insights/reports/global-risk-management-survey/top-global-risk-6-supply-chain-and-distribution-failure, assessed on 2024/01/16.

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Funding

National Science and Technology Council, 109-2410-H-305-017-, Ko-Chia Yu, 112-2918-I-305-001-, Ko-Chia Yu, National Science and Technology Council, 111-2410-H-305-080-, Ko-Chia Yu, National Taipei University, 109-NTPU_ORDA-F-001, Ko-Chia Yu, 112-NTPU_ORDA-F-003, Ko-Chia Yu.

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Authors and Affiliations

  1. Department of Finance, School of Management, National Chung Cheng University, No.168, Sec. 1, University Rd., Minhsiung, Chiayi, 621301, Taiwan

    Mu-Shu Yun

  2. Department of Business Administration, College of Business, National Taipei University, 151, University Rd., San Shia District, New Taipei City, 23741, Taiwan

    Ko-Chia Yu

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  1. Mu-Shu Yun
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Yun, MS., Yu, KC. Vertical propagation of default risk along the supply chain. Rev Quant Finan Acc (2024). https://doi.org/10.1007/s11156-024-01251-x

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