A new study by researchers in theFinance Departmentof theThe w88 sports betting app of Businessat thew88 sports betting app, Renofinds bond investors appear to be specifically considering supply-chain risks before they loan money to companies.
In fact, the study finds that companies with vertically integrated supply chains — ones in which they control most, if not all, of the steps in the production process — are being rewarded through lower borrowing costs in the financial markets
Theresearchby Qun Wu, a professor of finance, and Yifei Li, an assistant professor of finance, was recently published inThe British Accounting Review.
“Traditionally, corporate finance officers have focused on standard credit-risk factors such as leverage, interest coverage, and cash-flow stability,” said Li. “However, our research shows that supply chain structure — particularly the degree of vertical integration — also has a meaningful impact.”
When the global supply chain is disrupted by major shocks such as the pandemic or trade wars between the United States and China, bond investors are especially prone to value the ways that vertical integration can help buffer the economic winds and reduce borrowers’ risks.
But vertical integration isn’t without risks of its own, Wu and Li note.
A company might, for instance, invest in an expensive and highly specialized piece of equipment to vertically integrate its production. But if the company gets into financial trouble, that specialized equipment might prove difficult to sell.
Then, too, a vertically integrated company can’t easily shift to an outside supplier that might offer attractive prices.
“Vertical integration has both potential benefits and costs,” Li said. “What surprised us was the consistency of evidence supporting the risk-reducing perspective. We found that firms with higher levels of vertical integration tend to have lower bond-yield spreads.”
Given the strategic importance of supply-chain design, Li said the design often involves top-level executives of companies whose operations extend across the globe.
“Firms like Tesla — which operates a Gigafactory in Northern w88 sports betting app — have adopted highly integrated supply chains across key components, including battery production, powertrains, software development, supercharger infrastructure, and direct-to-consumer sales,” he said. “This level of integration has helped mitigate operational risks from global disruptions and carries significant financial implications.”
For a company that borrows hundreds of millions of dollars in the bond market, big savings can result from the willingness of lenders to reduce interest rates even a tiny bit to reflect the lower risks associated with a well-designed supply chain.
“Our results suggest that financial analysts should pay closer attention to firms with more internally coordinated and vertically integrated supply chains, as these firms tend to be better positioned to absorb external shocks,” Li said.
