Vertical propagation of default risk along the supply chain

This study investigates the propagation of default risk along the supply chain. We adopt a modified version of the firm-specific upstreamness measure from Gofman et al. (Rev Financ Stud 33:5856–5905, 2020) to assess each firm's vertical distance to the final consumption products in the supply chain. We find that upstream firms are more exposed to default risk, and the upstream effect is more substantial for firms that belong to less prominent, more leveraged, and less diverse supply chains. We also find that a distressed firm only affects its upstream suppliers but not its downstream customers. Our results are robust across various empirical specifications.