Previous research found that customer financial distress can spillover to supplier firm decisions. The aim of this paper is to examine the investment decisions of suppliers of financially distressed customers.
The paper uses a US sample of customer-supplier relationships from Compustat Segments between 1980 and 2017. The author uses a linear probability model in the baseline regression analysis. To ensure robustness, a logit regression model and an instrumental variable estimation approach are used, instrumenting for distress at the customer level using a negative shock to customer industry demand.
This study finds suppliers are more likely to reduce their investment in Capex when a customer is financially distressed. Supplier investment efficiency does not improve when a customer is financially distressed as suppliers with a greater likelihood of under-investment reduce their investment, while suppliers with a greater likelihood of over-investment increase their investment. The effect of customer distress on supplier investment decisions is more pronounced for suppliers of economically distressed customers.
This paper examines how suppliers adjust their investment in response to customer distress, providing an additional channel through which customer distress affects suppliers. Overall, this study finds an important real implication of financial distress in the buyer-supplier relationship.
The author appreciates helpful comments and suggestions from Julie Wu, Kathleen Farrell, Geoffrey Friesen, Mary McGarvey, Alexander Barinov (discussant), session participants at the 2019 Southern Finance Association Annual Meeting and an anonymous referee.
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