Do Credit Ratings Incorporate Business Linkages Along the Supply Chain?

42 Pages Posted: 15 Aug 2016

See all articles by Rong Huang

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy

Sunqian Ren

City University of New York (CUNY), Baruch College, Zicklin School of Business, Stan Ross Department of Accountancy, Students

Date Written: June 1, 2016

Abstract

This paper investigates whether credit ratings incorporate business linkages along the supply chain. We first document that a supplier’s bankruptcy risk is significantly associated with its major customer’s bankruptcy risk, thereby leading to a positive association between the credit ratings of the supplier and its major customer. However, the association between a supplier’s and its major customer’s credit rating changes is asymmetric. A supplier’s credit rating change is only positively associated with its major customer’s credit rating change when the customer has experienced a credit rating downgrade, but not when the customer has undergone an upgrade. This asymmetric effect is stronger when the customer-supplier relation lasts for a long time and when the customer is the largest customer of the supplier. We attribute this effect to the asymmetric payoff functions of the creditors, who focus on protecting downside risk rather than generating upside returns. Overall, our paper provides evidence that the customer’s credit worthiness influences the supplier’s credit ratings, suggesting that the debt market can be affected by the product market through the customer-supplier relations.

Keywords: supply chain, bankruptcy risk, credit ratings

JEL Classification: L1, G24, G32

Suggested Citation

Huang, Rong and Ren, Sunqian, Do Credit Ratings Incorporate Business Linkages Along the Supply Chain? (June 1, 2016). AAA 2017 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=2823323 or http://dx.doi.org/10.2139/ssrn.2823323

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
(646)312-3204 (Phone)

Sunqian Ren (Contact Author)

City University of New York (CUNY), Baruch College, Zicklin School of Business, Stan Ross Department of Accountancy, Students ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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