Vertical integration, supply chain disruptions, and corporate yield spreads

Abstract

Vertical integration can lower transaction costs and enhance a firm’s control over its supply chain, thereby mitigating supply chain risk and leading to lower yield spreads. However, it may also lead to asset specificity, which can reduce the liquidation value of assets and increase investment uncertainty, potentially resulting in higher yield spreads. We find that firms with greater vertical integration exhibit lower bond yield spreads. This effect is more pronounced for companies facing elevated supply chain risk, supporting the supply chain risk channel. Amid global supply chain disruptions such as the Covid-19 pandemic and the U.S.-China trade war, vertical integration takes on an even more important role in reducing credit spreads.