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Financial distress, bank branching deregulation, and customer-supplier relationships

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  • Lian, Yili

Abstract

The paper exploits the deregulation of interstate bank branching laws to examine whether improved access to bank credit for customer firms affects the probability of their suppliers' financial distress. The study provides robust evidence that suppliers' financial distress risk is lower when the states of their major customer firms experience bank branching deregulation. Furthermore, the study shows that customers establish new bank relationships and improve liquidity conditions, while suppliers offer less trade credit to customers, reduce leverage, and increase capital expenditures following customer state's bank branching deregulation. The effect of customers' improved access to credit on suppliers' distress risk is more pronounced for supplier firms with stronger customer-supplier relationships, for financially constrained suppliers, and for suppliers whose customers are financially unconstrained. Overall, the findings highlight the importance of customers' access to credit on the financial distress risk of their suppliers.

Suggested Citation

  • Lian, Yili, 2024. "Financial distress, bank branching deregulation, and customer-supplier relationships," Journal of Corporate Finance, Elsevier, vol. 88(C).
  • Handle: RePEc:eee:corfin:v:88:y:2024:i:c:s0929119924001081
    DOI: 10.1016/j.jcorpfin.2024.102646
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    More about this item

    Keywords

    Financial distress; Bank branching deregulation; Customer-supplier relationships; Access to credit; Supply chain;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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