The Supply Chain Effects of Bankruptcy

Forthcoming in Management Science

40 Pages Posted: 10 Jun 2012 Last revised: 11 Oct 2016

S. Alex Yang

London Business School

John R. Birge

University of Chicago - Booth School of Business

Rodney P. Parker

Indiana University Bloomington

Date Written: September 17, 2014

Abstract

This paper examines how a firm's financial distress and the legal environment regarding the ease of bankruptcy reorganization can alter product market competition and supplier-buyer relationships. We identify three effects, predation, bail-out, and abetment, that can change firms' behavior from their actions in the absence of financial distress. The predation effect increases competition before potential bankruptcy as the non-distressed competitor behaves as if it has some first-mover advantage, which could benefit a supplier with price control. The bailout effect reflects the supplier's incentive to grant the distressed firm concessions to preserve competition, improving supply chain efficiency and providing support for the exclusivity rule in Chapter 11 of the United States Bankruptcy Code when the supplier and the distressed firm are financially linked. The abetment effect is that the supplier may deliberately abet the competitor's predation, leading to increased operational disadvantages for the distressed firm before bankruptcy. Together these effects stress that a firm's bankruptcy potential can hurt its competitors and benefit its suppliers/customers. They also provide guidelines for firms' operational decisions in such situations, a rationale for observed firm actions surrounding bankruptcies, and motivation for policies supporting reorganization and relaxing broad enforcement of non-discriminatory pricing regulations.

Keywords: operations-finance interface; supply chain interaction; operational competitiveness; bankruptcy; Chapter 11; reorganization; liquidation; externality

Suggested Citation

Yang, S. Alex and Birge, John R. and Parker, Rodney P., The Supply Chain Effects of Bankruptcy (September 17, 2014). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=2080436 or http://dx.doi.org/10.2139/ssrn.2080436

S. Alex Yang (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Rodney P. Parker

Indiana University Bloomington ( email )

1309 E 10th Street, HH4129
Bloomington, IN 47405
United States

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