The Effect of Credit Rating Downgrades and Customer-supplier Relationships

38 Pages Posted: 19 Sep 2019

See all articles by Dallin Alldredge

Dallin Alldredge

Florida International University

Yinfei Chen

California State University Chico

Steve Liu

University of Oregon

Vicky (Lan) Luo

University of Hartford

Date Written: September 11, 2019

Abstract

Extant research documents the valuation effects of credit rating change on the stock price. This study extends the research by examining the information transfer effects of customer credit rating downgrades on supplier firms. We find that supplier firms experience negative abnormal returns during the announcement of customer firms’ rating downgrades. This effect persists over a 50 trading day window after the downgrade announcement. We also find that credit rating deterioration spreads along the supply chain, where the probability of future rating downgrades is significantly higher for supplier firms with downgraded customers. Further, we show that the information transfer effects are associated with certain cross-sectional factors, including the market anticipation of customers rating downgrades, the strength of the customer-supplier linkage, the valuation effects within customer firms’ industries, and investor attention on supplier firms.

Keywords: Credit rating downgrade; customer-supplier economic linkage; cumulative abnormal returns (CARs); credit risk

JEL Classification: G12; G14; G24

Suggested Citation

Alldredge, Dallin and Chen, Yinfei and Liu, Steve and Luo, Vicky (Lan), The Effect of Credit Rating Downgrades and Customer-supplier Relationships (September 11, 2019). Available at SSRN: https://ssrn.com/abstract=3452275 or http://dx.doi.org/10.2139/ssrn.3452275

Dallin Alldredge

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Yinfei Chen (Contact Author)

California State University Chico ( email )

400 W 1st St
Chico, CA 95929
United States
7204314128 (Phone)
95928 (Fax)

Steve Liu

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Vicky (Lan) Luo

University of Hartford ( email )

West Hartford, CT 06117-1599
United States

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