Credit Risk and Inter-Firm Dependence

Abstract

I explore whether inter-firm linkages affect firms' credit risk. After controlling for the endogeneity between a firm's credit risk and its dependence on customers and suppliers, I find that supply-chain relationships affect firms' credit risk. My results indicate firms with exposure to major customers have lower ratings, and the level of firm dependence on major customers is negatively associated with firms' credit ratings. Further, I show when a firm's customers also depend on it, this mitigates the negative effect of dependence on credit risk. Finally, I document a negative association between a customer's reliance on its dependent suppliers and the customer's credit rating. Overall, my results provide insights regarding how inter-firm relationships between corporate customers and suppliers affect credit risk.