Global Supply Chains and Cross-Border Financing

Abstract

This paper provides evidence that the formation of global supply chain partnerships predicts significant increases, relative to otherwise similar firms, in cross-border financing. Our findings are detected in all three major financing markets - equities, syndicated loans, and public debt - as well as for cross-border capital flows in M&A deals. Our findings are robust to controls for standard firm-level determinants, industry- and country-specific shocks, and endogeneity concerns. We propose that our findings reflect an informational channel whereby firms are able to overcome informational obstacles to cross-border financing by integrating into the global supply chain network. In effect, because of the associated due diligence, a new global supply chain partnership can serve to reduce information asymmetry and provide favorable information regarding a firm’s products and operations, as well as its financial health. We provide evidence consistent with an informational channel using a battery of cross-sectional heterogeneity tests, including tests that individually consider firm-level measures of visibility, supply-chain disclosure decisions, cross-country differences in informational environments, and differential effects for suppliers versus customers. Our findings have important implications for firms attempting to identify supply-chain partners, and particularly for decisions on integrating into the global supply-chain network. More broadly, our findings suggest that the information generated by operational activities can have important effects on subsequent financing activities, which contributes to the academic literature at the interface of operations and finance.

Keywords: global supply chains, cross-border financing, product market, financial market

JEL Classification: L14, G15, G30, G32