Valuation Effects of Bankruptcy along the Supply Chain of the Pulp and Paper Industry

This paper examines the market reactions along the supply chain of North American pulp and paper companies due to bankruptcy announcements that occurred between 1990 and 2009. We document that the mills and paper manufacturing sectors are linked vertically through intersectoral trade, and that the logging and printing sectors are main suppliers and customers of the pulp and paper industry. During the month of bankruptcy announcement, the market values of a bankrupt firm drop by 33-78% and the value of a value-weighted equity portfolio of paper manufacturing firms drops about 7.2% in response to a bankruptcy announcement in the mills sector. The market reactions to financial distress focus more on the period prior to the announcement after the 2008 financial crisis. Our results suggest that shareholders suffer substantial losses during the month a bankruptcy occurs and there is a contagion effect produced by the bankruptcy on other firms along the supply chain.