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

Abstract

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.