Buyer's Bankruptcy Risk, Sourcing Strategy, and Firm Value: Evidence from the Supplier Protection Act

Karca D. Aral, Erasmo Giambona, Ye Wang

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

What should a distressed buyer's sourcing strategy be? We find that this depends on the dynamics in a potential in-court bankruptcy. To establish causality, we use a novel sourcing data set in combination with a unique quasi-natural experimental setting provided by a regulatory shock that significantly strengthened the protection granted to suppliers when a distressed buyer files for bankruptcy: the Supplier Protection Act. We find that, following this regulatory change, the number of suppliers for buyers near financial distress (those most affected by the act, the treated group) increased by nearly 35% relative to financially sound firms (the control group). We also find that this shift allowed distressed buyers to obtain more trade credit, expand inventory holdings, and increase performance, leading to an overall increase in firm value of 7.2%. In turn, these effects led to a sizable reduction in the probability of the affected buyers defaulting and filing for bankruptcy. Our results have important implications for corporate executives: right-sizing the supply base can be critical for buyers near financial distress, and implementing policies to engage and protect suppliers can be the way out of distress.

Original languageEnglish (US)
Pages (from-to)7940-7957
Number of pages18
JournalManagement Science
Volume68
Issue number11
DOIs
StatePublished - Nov 2022

Keywords

  • buyer's bankruptcy risk
  • firm value
  • quasi-natural experiment
  • sourcing strategy
  • trade credit

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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