Suppliers’/customers’ production efficiency uncertainty and firm credit risk

Tsung-Kang Chen, Hsien Hsing Liao*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

This study explores the effects of business counterparties’ (i.e. suppliers’/customers’) production efficiency uncertainty (PEU) on corporate credit risk by employing American bond observations of manufacturing firms. Empirical results of this study show that customers’ PEU is positively related to corporate bond yield spreads whereas suppliers’ has an opposite effect. The former result shows the importance of demand uncertainty while the latter one suggests that the benefits of supply chain integration or information sharing exceed the costs of supply chain uncertainty. We also find that the effects of suppliers’/customers’ PEUs on bond yield spreads are significantly affected by the information flow risk within the supply chain. In addition, the customer-side effect becomes weaker during the financial crisis period, whereas the supplier-side one is insignificantly affected. These empirical results are robust when controlling for potential endogeneity problems and employing an alternative sample which consists of the bond observations with both supplier and customer identification information. Finally, it has to be noticed that our conclusions are only applicable to manufacturing industries.

Original languageEnglish
Pages (from-to)519-560
Number of pages42
JournalReview of Quantitative Finance and Accounting
Volume50
Issue number2
DOIs
StatePublished - 1 Feb 2018

Keywords

  • Business counterparties (suppliers/customers)
  • Credit risk
  • Information flow risk
  • Production efficiency uncertainty
  • Supply chain uncertainty

Fingerprint Dive into the research topics of 'Suppliers’/customers’ production efficiency uncertainty and firm credit risk'. Together they form a unique fingerprint.

Cite this