The Epidemiology of Corporate Investment and Financial Constraints in Production Networks

89 Pages Posted: 1 Sep 2021 Last revised: 13 Apr 2023

See all articles by William Grieser

William Grieser

Texas Christian University ; Texas Christian University - M.J. Neeley School of Business

Ioannis Spyridopoulos

American University, Kogod School of Business

Morad Zekhnini

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: April 10, 2023

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

Suggested Citation

Grieser, William and Spyridopoulos, Ioannis and Zekhnini, Morad, The Epidemiology of Corporate Investment and Financial Constraints in Production Networks (April 10, 2023). Available at SSRN: https://ssrn.com/abstract=3904480 or http://dx.doi.org/10.2139/ssrn.3904480

William Grieser

Texas Christian University ( email )

Fort Worth, TX 76129
United States

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Ioannis Spyridopoulos (Contact Author)

American University, Kogod School of Business ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States

Morad Zekhnini

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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