Buyer Beware : Industry Links and Bankruptcy

This paper develops a model for forecasting bankruptcy at the industry level that accounts for bankruptcy contagion from customers and suppliers. Utilizing customer and supplier relationship networks, I find that both customer and supplier bankruptcies explain bankruptcies in the subject industry. However, when accounting for the endogeneity in the supply chain, I find that only bankruptcies in supplier industries cause bankruptcies in the subject industry. This contrasts with a previous study that only finds a relationship between customer bankruptcies and subject firms. Furthermore, the impact of supplier bankruptcies on subject industry bankruptcies is economically larger than other determinants of bankruptcy in the literature. To reinforce the notion of bankruptcy contagion, I find that close supplier bankruptcies have a larger influence on subject industry bankruptcies than far supplier bankruptcies. Finally, I find that high bankruptcies in central industries lead to high bankruptcies across the entire economy. These results provide a new explanation of why bankruptcies cluster in time. If an initial random bankruptcy shock in one industry propagates along industry links to a central hub industry or initiates from a central hub industry, a bankruptcy wave could branch out to many other industries in parallel from that central industry causing widespread bankruptcies across the economy