Suppliers’/customers’ production efficiency uncertainty and firm credit risk

This study explores the effects of business counterparties’ (i.e. suppliers’/customers’) production efficiency uncertainty (PEU) on corporate credit risk by employing American bond observations of manufacturing firms. Empirical results of this study show that customers’ PEU is positively related to corporate bond yield spreads whereas suppliers’ has an opposite effect. The former result shows the importance of demand uncertainty while the latter one suggests that the benefits of supply chain integration or information sharing exceed the costs of supply chain uncertainty. We also find that the effects of suppliers’/customers’ PEUs on bond yield spreads are significantly affected by the information flow risk within the supply chain. In addition, the customer-side effect becomes weaker during the financial crisis period, whereas the supplier-side one is insignificantly affected. These empirical results are robust when controlling for potential endogeneity problems and employing an alternative sample which consists of the bond observations with both supplier and customer identification information. Finally, it has to be noticed that our conclusions are only applicable to manufacturing industries.