Supply-Chain Flexibility and the Cost of Debt: Evidence from Uncertainty Shocks

Abstract

We analyze whether supply-chain constraints of firms affect their external financing premia. We use policy and economic uncertainty shocks as a source of external disturbances to firms' manufacturing processes and examine how supply-chain flexibility affects the price and non-price terms of bank-loan contracts for a sample of U.S. manufacturing firms. We find that banks tighten lending standards during uncertainty shocks, reducing funding liquidity for firms. Funding liquidity decreases disproportionately more for firms with lower flexibility in sourcing inputs from their suppliers. Supply-chain flexibility becomes particularly valuable to firms when they have little power in their product markets. These results are robust to endogeneity, alternative measures of flexibility and costs of borrowing, bank-level liquidity shocks, and feedback effects between price and non-price loan-contract terms. Given the prevalence of increasingly complex supply chains in modern production processes, our results suggest that supply-chain constraints significantly impact debt contracting and are important channels via which financial intermediaries transfer the impact of uncertainty shocks to the real sector.