Companies under stress: the impact of shocks on the production network

Abstract

In this paper we analyze the effect of shocks in production networks. Our work is based on a rich dataset that contains information about companies from Slovenia right after the financial crisis of 2008. The processed data spans for 8 years and covers the transaction history as well as performance indicators and various metadata of the companies. We define sales shocks at different levels, and identify companies impacted by them. Next we investigate stress, the potential immediate upstream and downstream impact of a shock within the production network. We base our main findings on a matched pairs analysis of stressed companies. We find that both shock and stress are associated with reporting bankruptcy in the future and that stress foremost impacts the future sales of customers. Furthermore, we find evidence that stress not only results in performance losses but the reconfiguration of the production network as well. We show that stressed companies actively seek for new trading partners, and that these new links often share the industry of the shocked company. These results suggest that both stressed customers and suppliers react quickly to stress and adjust their trading relationships.