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Ripple effects from industry defaults

Author

Listed:
  • Wolff, Christian
  • Bams, Dennis
  • Pisa, Magdalena

Abstract

This paper studies early default risk spillovers to small businesses. This study shows that default rates among small businesses are significantly higher following default on S&P rated debt in their or their customers' industries. Using a new data set on S&P rated debt default, small business default, production process linkages and industry characteristics, we find evidence of negative wealth effects transmitted to small businesses along the production process. Also, such ripple effects are mitigated in loan portfolios that are concentrated into large and highly interconnected industries. We observe that a large number of firms in an industry serves to cushion default risk transmission. This is much like how the broad economic connections other the benefits of diversification.

Suggested Citation

  • Wolff, Christian & Bams, Dennis & Pisa, Magdalena, 2015. "Ripple effects from industry defaults," CEPR Discussion Papers 10891, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10891
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    References listed on IDEAS

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    Cited by:

    1. Rose Kenney & Gianni La Cava & David Rodgers, 2016. "Why Do Companies Fail?," RBA Research Discussion Papers rdp2016-09, Reserve Bank of Australia.
    2. Xiaolu Hu & Haoyi Luo & Zijin Xu & Jiang Li, 2021. "Intra‐industry spill‐over effect of default: Evidence from the Chinese bond market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4703-4740, September.
    3. Azizpour, S & Giesecke, K. & Schwenkler, G., 2018. "Exploring the sources of default clustering," Journal of Financial Economics, Elsevier, vol. 129(1), pages 154-183.

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    More about this item

    Keywords

    Default risk transmission; Default clustering; Market structure; Supply chain;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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