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Finance Research Letters 15 (2015) 232–238 Contents lists available at ScienceDirect Finance Research Letters journal homepage: doc.001pp.com/locate/frl Credit contagion and competitive effects of bond rating downgrades along the supply chain Jung-Hsien Chang a, Mao-Wei Hung b, Feng-Tse Tsai c,∗ a Department of Banking and Finance, National Chi Nan University, No. 1, University Road, Puli, Nantou County 54561, Taiwan b Department of International Business, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei City 106, Taiwan c Department of Finance, Asia University, 500, Lioufeng Rd., Wufeng, Taichung 41354, Taiwan article info Article history: Received 26 August 2015 Accepted 16 October 2015 Available online 24 October 2015 JEL Classi?cation: G10 G14 G30 G33 Keywords: Credit risk Credit rating Contagion effect Competitive effect Supply chain abstract This study investigates credit risk effects of credit rating downgrades on downgraded ?rms’ intra-industry rivals (horizontal relation), suppliers and customers (vertical relation). Using event study approach, we analyze credit default swap (CDS) spread changes for downgraded ?rms’ rivals, suppliers and customers. The result shows that rivals and suppliers experience signi?cant credit spread increases during bond rating downgrades. Suppliers suffer from vertical credit contagion only conditioning on occurrence of horizontal credit contagion (increasing credit risk among intra-industry rivals). When horizontal credit competitiveness happens (decreasing credit risk among intraindustry rivals), customers appear to have vertical credit competitive effects. © 2015 Elsevier Inc. All rights reserved. 1. Introduction Firms are not independent entities in the economy but are linked to each other through explicit or implicit relationships. Because of the economic dependency among the ?rms, any shock to one ?rm has a rippling effect to its linked partners. The linkages between ?rms in the economy are of special ∗ Corresponding author. Tel.: +886 ***6; fax: +886 ***1. E-mail address: fttsai@gm.asia.edu.tw, fttsai@asia.edu.tw (F.-T. Tsai). http://dx.doi.org/10.1016/j.frl.2015.10.006 1544-6123/© 2015 Elsevier Inc. All rights reserved. J.-H. Chang et al. / Finance Research Letters 15 (2015) 232–238 233 interest in the case of ?nancial distress. One ?rm suffering from ?nancial problems can have valuation implications for ?rms which are linked in the product market (industry rivals) or along the supply chain (suppliers and customers). Therefore, default clustering often happens because the economic links of default event ?rms spread credit risk to other related ?rms. Existing studies investigate the wealth effects of stockholders for intra-industry rivals, suppliers and customers in ?nancial distress events. However, little evidence on the wealth effects of debtholders for distressed ?rms’ suppliers and customers. In addition, how these effects of suppliers and customers interact with the wealth effects for industry rivals is also unknown in the literature. The goal of this paper is to close the gap in the related research. This study is motivated by several strands of research in ?nance. One line of research examines stock reaction of related ?rms during ?nancial distress events such as bankruptcy of Chapter 11 (reorganization), bankruptcy of Chapter 7 (liquidation), pre-?ling distress (dramatic stock price drop) and credit rating downgrades (or negative outlook). A representative study by Lang and Stulz (1992) shows that bankruptcy announcements have negative effect (contagion effect) for highly levered industries and industries where nonbankrupt and bankrupt ?rms are highly correlated in stock returns, but have positive effect (competitive effect) for highly concentrated industries with low leverage. Jorion and Zhang (2010) ?nd that stock returns of industry portfolios have contagion effects for investment-grade ?rms but have predominant competitive effects for speculative-grade ?rms. Additionally, Hertzel et al. (2008) extend previous research by examining the wealth effect of distress on suppliers and customers. They ?nd that signi?cant contagion effects of stockholders for suppliers exist in bankruptcy ?lings and these effects are more negative when intra-industry contagion is more severe. Another line of research discusses the wealth effects of debtholders for intra-industry rivals during ?nancial distress events. Jorion and Zhang (2007) examine the intra-industry information transfer effects of credit events in the credit default swaps (CDS) and stock markets. They provide evidence of credit contagion effects for Chapter 11 bankruptcies and credit competitive effects for Chapter 7 bankruptcies. Comparing to Lang and Stulz (1992), they ?nd that reactions in stock markets are relatively less signi?cant than reactions in CDS markets. Jorion and Zhang (2009) ?nd that bankruptcy announcements have credit contagion (negative abnormal stock returns and increasing CDS spreads) for trade counterparties (creditors) and this counterparty default risk can result in clustering of default. Spillover effects of credit risk among countries in the Eurozone (e.g., Alemany et al., 2015) and between stock/bond and CDS markets (e.g., Chang et al., 2012; Delis and Mylonidis, 2011) are also discussed in the literature. To the best of my knowledge, no literature covers information transfer effect of credit events on debtholders along the supply chain. Current studies (e.g., Hertzel et al., 2008) only focus on the wealth effects of stockholders along the supply chain in credit events. However, it is intuitive that credit contagion or competitive effects along the supply chain are more directly linked to these credit events. In addition, several credit events imply different reactions across stock and credit markets. For example, increasing leverage leads to a wealth transfer from debtholders to stockholders and hence results in distinct stock and credit reactions (Goh and Ederington, 1993). Therefore, the objective of this paper is to discover the information transfer effects of credit events along the supply chain in credit markets. Comparing with bankrupt events, credit rating downgrade events are more frequent, cover more ?rms and hence the effect of negative credit events along the supply chain can be more comprehensive. In addition, credit rating downgrades communicate credit quality deterioration of bond issuers to investors before the ?rms go bankruptcy.1 Thus, it is interesting to investigate if credit rating downgrade information also transfers across market segments. We focus on the information transmission effect of credit rating downgrade through the supply chain, i.e., suppliers and customers in product markets. The supply chain relationship helps these connected ?rms inherit production e?ciency. Therefore, when one ?rm in the supply chain suffers from credit rating downgrade, the event may in?uence operation of its linked ?rms and hence their stock returns or credit risk. The remainder of this paper is organized as follows. Section 2 presents the data source and processing as well as summary statistics. In Section 3, we illustrate the methodology applied in this research. Section 4 summarizes our empirical results. We conclude in Section 5. 1 Fabozzi et al. (2007) take rating as one fundamental variable on the pricing of CDS. 234 J.-H. Chang et al. / Finance Research Letters 15 (2015) 232–238 Table 1 Sample characteristics. Panel A: distribution of downgrade events by issuer (full sample, N = 358) Issuer # Mean Median Max Min SD 100 3.58 2.5 19 1 Panel B: industry distribution 1-digit SIC Industry Obs. 1 2 3 4 5 6 7 8 Total Mining and construction 12 Manufacturing (food–petroleum) 72 Manufacturing (plastics–electronics) 170 Transportation 25 Wholesale trade and retail trade 47 Finance, insurance, and real estate 12 Services (hotel–recreation) 19 Services ( 内容过长，仅展示头部和尾部部分文字预览，全文请查看图片预览。 nc. Econ. 84, 860–883. Jorion, P., Zhang, G., 2009. Credit contagion from counterparty risk. J. Financ. 64, 2053–2087. Jorion, P., Zhang, G., 2010. Information transfer effects of bond rating downgrades. Financ. Rev. 45, 683–706. Lang, L.H.P., Stulz, R., 1992. Contagion and competitive intra-industry effects of bankruptcy announcements : an empirical analysis. J. Financ. Econ. 32, 45–60. Odders-White, E.R., Ready, M.J., 2006. Credit ratings and stock liquidity. Rev. Financ. Stud. 19, 119–157. [文章尾部最后500字内容到此结束,中间部分内容请查看底下的图片预览]请点击下方选择您需要的文档下载。

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