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

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