An Empirical Analysis of the Propagation of Corporate Bankruptcy

         
Author Name ARATA Yoshiyuki (Fellow, RIETI)
Creation Date/NO. June 2018 18-E-040
Research Project Large-scale Simulation and Analysis of Economic Network for Macro Prudential Policy
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Abstract

In our modern economy, firms are interconnected in a complex network of various relationships such as customer-supplier relationships. The important role that this network structure for aggregate fluctuations plays in aggregate fluctuations has received increasing attention in recent studies, and the analysis of shock propagation on the network has become an important field of research. The propagation of corporate bankruptcy via a production network is an example of such phenomena. A customer's bankruptcy may lead to a considerable loss for the firm's suppliers (e.g., losses in trade credit and future earnings), causing a cascade of bankruptcies among suppliers. This paper empirically analyzes this contagion effect by merging two comprehensive datasets, one on customer-supplier relationships of more than one million firms in Japan and the other on bankruptcies from April 2013 to February 2017, recorded on a daily basis. Our dataset enables us to identify the suppliers facing customer bankruptcy and to analyze the suppliers' subsequent response. We show that the contagion effect is economically and statistically significant at the firm level; for example, bankruptcies of 50% customers approximately double the bankruptcy probability of their suppliers. Based on this result, we examine the aggregate impact of the contagion effect by simulating our model. We find that bankruptcy propagation is highly unlikely to be pervasive even though there is a significant contagion effect at the firm level. This is because the aggregate consequence of bankruptcies is determined by the combined effect of the contagion at the firm level and the production network structure. Bankruptcy shocks are immediately absorbed by the economy because of the small-worldness of the production network. This characteristic feature of the production network prevents bankruptcy propagation in the economy, thus, it is unlikely to occur.