Credit Risk Propagation Along Supply Chains: Evidence from the CDS Market

60 Pages Posted: 4 Dec 2017 Last revised: 6 Jan 2019

See all articles by Senay Agca

Senay Agca

George Washington University - School of Business, Department of Finance

Volodymyr Babich

McDonough School of Business, Georgetown University

John R. Birge

University of Chicago - Booth School of Business

Jing Wu

City University of Hong Kong College of Business

Date Written: November 27, 2017

Abstract

We find that credit risk propagates through multiple supply chain tiers for both positive and negative credit shocks. Specifically, rating and industry-adjusted CDS spreads change by 44-71 bps for the first tier. Strong propagation persists for 2nd and 3rd tiers for adverse shocks, but attenuates for favorable shocks. Such effects are not observed for inactive supply chain links. Credit risk propagation is magnified with longer-term supply-chain relations, trade credit, differentiated products, and leverage, but is moderated with investment grade rating and high inventory. Credit risk propagation is stronger for supply chain partners followed by the same analysts.

Online appendix available at: http://ssrn.com/abstract=3309206.

Keywords: Supply Chains, CDS Contagion, Multi-Tier Supply Networks, Credit Risk

JEL Classification: E43, E51, G12, G14, G23, G24, G32, L11, L22

Suggested Citation

Agca, Senay and Babich, Volodymyr and Birge, John R. and Wu, Jing, Credit Risk Propagation Along Supply Chains: Evidence from the CDS Market (November 27, 2017). Georgetown McDonough School of Business Research Paper No. 3078752. Available at SSRN: https://ssrn.com/abstract=3078752 or http://dx.doi.org/10.2139/ssrn.3078752

Senay Agca

George Washington University - School of Business, Department of Finance ( email )

2201 G Street
Funger Hall 505
Washington, DC 20052
United States
202-994-9209 (Phone)
202-994-5014 (Fax)

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

Volodymyr Babich

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Jing Wu (Contact Author)

City University of Hong Kong College of Business ( email )

Tat Chee Avenue
Kowloon Tong
Kowloon
Hong Kong

HOME PAGE: http://www.jingwulab.org

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