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Spreading the Misery? Sources of Bankruptcy Spillover in the Supply Chain

Published online by Cambridge University Press:  29 December 2016

Madhuparna Kolay ,
Michael Lemmon  and
Elizabeth Tashjian
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Abstract

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We document that suppliers to purely financially distressed companies that are highly likely to reorganize in bankruptcy incur little or no spillover costs. In contrast, suppliers to economically distressed firms experience large losses in market value that are linked to proxies for the cost of replacing the bankrupt customers. Suppliers experience increased selling, general, and administrative (SG&A) expenses and lower margins in the year following the bankruptcy of their trading partners, which we link to proxies for partner replacement costs. Suppliers continue to extend trade credit to firms that are healthier and in situations where the cost of replacing the partner is higher.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 6 , December 2016 , pp. 1955 - 1990
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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