Abstract
This study investigates credit risk effects of credit rating downgrades on downgraded firms’ intra-industry rivals (horizontal relation), suppliers and customers (vertical relation). Using event study approach, we analyze credit default swap (CDS) spread changes for downgraded firms’ rivals, suppliers and customers. The result shows that rivals and suppliers experience significant credit spread increases during bond rating downgrades. Suppliers suffer from vertical credit contagion only conditioning on occurrence of horizontal credit contagion (increasing credit risk among intra-industry rivals). When horizontal credit competitiveness happens (decreasing credit risk among intra-industry rivals), customers appear to have vertical credit competitive effects.
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