The Epidemiology of Corporate Investment and Financial Constraints in Production Networks

Abstract

We quantify the spillover effects of financial constraints on investment behavior in production networks using an epidemiological approach. Financial constraints generate a series of investment distortions that transmit to supply-chain partners with interdependent opportunities. We estimate that this transmission mechanism induces a multiplier effect, such that the aggregate forgone investment is approximately double that of the initial constrained firm. To facilitate identification, we exploit a Network Regression Discontinuity Design to quantify the spillover effects of loan covenant violations on supply chain partners' investments. Overall, we show that ignoring contagion effects considerably understates the broader consequences of financial constraints on investment.

Keywords: Financial constraints, Corporate investment, Production networks, Supply chain, Spillovers, Contagion, Regression discontinuity, Spatial econometrics

JEL Classification: C21, D22, D85, E23, G31, L14, L21, L23, L25