Spreading the Misery? Sources of Bankruptcy Spillover in the Supply Chain

Abstract

We document that suppliers to purely financially distressed companies that are highly likely to reorganize in bankruptcy incur little or no spillover costs. In contrast, suppliers to economically distressed firms experience large losses in market value which are linked to proxies for the cost of replacing their bankrupt customer. Suppliers experience increased SG&A expenses and lower margins in the year following their trading partner’s bankruptcy which we link to proxies for partner replacement costs. Suppliers continue to extend trade credit to firms which are healthier and where the cost of replacing the partner is higher.

Keywords: Bankruptcy, Financial distress, Contagion, Supply chain

JEL Classification: G30, G33