The Impact of COVID-19 on Supply Chain Credit Risk
52 Pages Posted: 1 Jul 2020 Last revised: 5 May 2023
Date Written: July 1, 2020
While global supply chains provide firms with a buffer against local shocks, they expose firms to multi-regional risks. The COVID-19 pandemic and its differential impact on different regions in the world offer an opportunity to explore these effects. We investigate the multi-regional supply chain risk by focusing on credit risk measured by abnormal CDS spreads and US-China supply chain networks. Our evidence shows that local risks propagate through global supply chains to other regions. Using a matched sample, we find that abnormal CDS spreads for firms with Chinese supply chain partners increase by 12-13 percent relative to the average raw CDS spreads due to supply chain disruptions during the economic shutdown in China, and the abnormal CDS spreads decrease by 9-13 percent relative to the average raw CDS spreads when the supply chain activities resume in China. We also find that having a more global customer base can mitigate the effects of local household demand shocks. Lastly, we discover that firm size, supply chain network centrality, cash holdings, inventory, strong credit ratings, capital redeployability, and the number of segments increase resilience to global supply chain shocks, while financial leverage, operational leverage, and market competition weaken supply chain resilience.
Keywords: Global Supply Chains, COVID-19 Pandemic, Credit Risk, CDS
JEL Classification: E21, E51, F23, G12, G14, G23, G32, L11
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