Credit Market Disruptions and Liquidity Spillover Effects in the Supply Chain

Anna Costello

Journal of Political Economy, 2020, vol. 128, issue 9, 3434 - 3468

Abstract: How do shocks to the banking sector travel through the corporate economy? Using a novel data set of interfirm sales, I show that suppliers exposed to a large and exogenous decline in bank financing pass this liquidity shock to their downstream customers. The spillover effect occurs through two channels: a reduction in trade credit offered and a reduction in the total supply of goods and services. After exposure to the spillover, downstream customers show a spike in credit risk and a reduction in employment. Overall, the paper highlights the importance of financial spillovers in explaining corporate sector outcomes.

Date: 2020
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