DP10891 Ripple effects from industry defaults

Author(s): Dennis Bams, Magdalena Pisa, Christian C Wolff
Publication Date: October 2015
Keyword(s): default clustering, default risk transmission, market structure, supply chain
JEL(s): G17, L14, L25
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10891

This paper studies early default risk spillovers to small businesses. This study shows that default rates among small businesses are significantly higher following default on S&P rated debt in their or their customers' industries. Using a new data set on S&P rated debt default, small business default, production process linkages and industry characteristics, we find evidence of negative wealth effects transmitted to small businesses along the production process. Also, such ripple effects are mitigated in loan portfolios that are concentrated into large and highly interconnected industries. We observe that a large number of firms in an industry serves to cushion default risk transmission. This is much like how the broad economic connections other the benefits of diversification.