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The Financial Implications of Supply Chain Changes

Author

Listed:
  • Joel F. Houston

    (Department of Finance, Insurance and Real Estate, Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

  • Chen Lin

    (Faculty of Business and Economics, The University of Hong Kong, Pok Fu Lam, Hong Kong)

  • Zhongyan Zhu

    (Department of Banking and Finance, Monash Business School, Monash University, Melbourne, Victoria 3145, Australia)

Abstract

We examine how a firm’s bankruptcy affects the bank financing costs of its key suppliers. We do so by using an extensive, hand-collected data set that captures the supply chain relationships of bankrupt firms over the time period 1990–2009. Looking at a sample of more than 2,000 loan contracts, we compare the average borrowing cost of suppliers in the two years prior to the bankruptcy of a key customer to the average cost in the two years following the announced bankruptcy. We find the average loan spreads increase by roughly 20% following the customer’s announced bankruptcy. These effects are even stronger if the bankrupt firm is operating within a distressed industry or when there is a strong supplier–customer relationship. We also find that the structure of lending agreements significantly changes in the aftermath of a client bankruptcy. More specifically, we find that the number of covenants increases and the lead banker(s) take an increasingly important role in the period following the client’s bankruptcy. Taken together, the results of this study provide new insights into the financial implications of supply chain changes. This paper was accepted by Uday Rajan, finance .

Suggested Citation

  • Joel F. Houston & Chen Lin & Zhongyan Zhu, 2016. "The Financial Implications of Supply Chain Changes," Management Science, INFORMS, vol. 62(9), pages 2520-2542, September.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:9:p:2520-2542
    DOI: 10.1287/mnsc.2015.2159
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    References listed on IDEAS

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