The effect of credit rating downgrades along the supply chain. Issue 1 (14th December 2021)

• Record Type: Journal Article
• Authors: Alldredge, Dallin M.; Chen, Yinfei; Liu, Steve; Luo, Lan
• Is Part Of: Review of accounting and finance. Volume 21:Issue 1(2022)
• Page Start: 1
• Page End: 31
• Publication Date: 2021-12-14
• Subjects: Credit rating downgrade -- Supply chain -- Credit risk; Accounting -- Periodicals; Corporations -- Finance -- Periodicals; 657.05
• DOI: 10.1108/RAF-10-2020-0295
• Languages: English
• ISSNs: 1475-7702

Abstract

Abstract : Purpose: This study aims to examine the information transfer effects of customers' credit rating downgrades on supplier firms. Design/methodology/approach: In this study, the authors use suppliers' cumulative abnormal returns around customers' credit rating downgrade events to identify how shocks to customer credit impact supplier equity prices. The authors also incorporate ordinary least squares and weighted least squares regressions regression analysis of the determinants of supplier market response to customer downgrades. Findings: The authors find that customer credit rating downgrades present significant negative shocks to the stock prices of supplier firms. Moreover, the authors show that the information transfer effects are determined by both firm- and industry-level factors, including the market anticipation of downgrades, the strength of the customer–supplier linkage, the industry rivals' reactions to the downgrades and investor attention. The authors also find that the likelihood that a supplier will receive a rating downgrade is significantly higher following its primary customer firm's downgrade. Originality/value: To the best of the authors' knowledge, this paper is the first to explore the information transfer effects of credit rating downgrades on primary stakeholders within the supply chain. The authors document that customer–supplier networks have valuable implications for the spillover effect across debt and equity holders. Information about customers' financial stress is incorporated into suppliers' equity prices outside of the context of customer bankruptcy.