219 / 2024-04-23 14:18:57

Your Debt Matters to My Business: Spillover Effect of Buyers’ Debt Structure on Suppliers’ Credit Risk

credit risk, debt structure, trade credit, bank loans

Traditionally, credit risk is monitored internally based on a firm’s decisions and financial status. However, firms within a supply chain are interdependent, and the debt structure of their partner may induce a spillover effect on their credit risk. This study aims to fill the literature gap by investigating how buyers’ debt structure affects suppliers’ credit risk. Our findings show that buyers’ trade credit increases the credit risk of their suppliers. In addition, buyers’ bank loans negatively affect the credit risk of their suppliers. Further, the impact of buyers’ debt structure on their suppliers’ credit risk is moderated by buyer-supplier dependence: A higher level of buyers’ stability strengthens, but a higher level of buyers’ industry competition weakens the impact. Moreover, by differentiating the specific types of trade credit and bank loans, we find that buyers’ deposits received have a higher impact on suppliers’ credit risk than accounts payable and notes payable do, showing the more significant role of product delivery risk compared to debt repayment risk. We further note that buyers’ long-term bank loans, in terms of credit loans, dominate suppliers’ credit risk compared with guaranteed loans and collateralized loans. We then discuss how buyers’ debt structure affects suppliers’ credit risk and the resulting contagious effect of credit risk along the supply chain. Our findings suggest that firms should consider their supply chain partners’ debt structure and their interdependence level with the partners to comprehensively and effectively manage their credit risk.