The Financial Implications of Supply Chain Changes

46 Pages Posted: 31 Dec 2014

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Zhongyan Zhu

Monash University

Date Written: December 29, 2014

Abstract

We examine how a firm’s bankruptcy affects the bank financing costs of its key suppliers. We do so by using an extensive, hand-collected data set that captures the supply chain relationships of bankrupt firms over the time period 1990-2009. Looking at a sample of more than 2000 loan contracts, we compare the average borrowing cost of suppliers in the two years prior to the bankruptcy of a key customer to the average cost in the two years following the announced bankruptcy. We find the average loan spreads increase by roughly 20% following the customer’s announced bankruptcy. These effects are even stronger if the bankrupt firm is operating within a distressed industry, or when there is a strong supplier-customer relationship. We also find that the structure of lending agreements significantly changes in the aftermath of a client bankruptcy. More specifically, we find that the number of covenant increases and the lead banker(s) take an increasingly important role in the period following the client’s bankruptcy. Taken together, this study provides new insights into the financial implications of supply chain changes.

Suggested Citation

Houston, Joel F. and Lin, Chen and Zhu, Zhongyan, The Financial Implications of Supply Chain Changes (December 29, 2014). Available at SSRN: https://ssrn.com/abstract=2543707 or http://dx.doi.org/10.2139/ssrn.2543707

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

HOME PAGE: http://sites.google.com/site/zhougyanzhu/

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