How do shocks to the banking sector travel through the corporate economy? Using a novel dataset of inter-firm sales, I show that suppliers exposed to a large and exogenous decline in bank financing pass this liquidity shock to their downstream customers. The spillover effect occurs through two channels: a reduction in trade credit offered on each sale, and a reduction in the total supply of goods and services. The trade credit channel explains a large portion of the initial spillover, with the least important customers seeing the largest decline in credit. Subsequently, both trade credit and total sales decline, leading to adverse consequences for downstream firms. After exposure to the spillover, customers show a spike in credit risk and a reduction in employment, suggesting that they can’t fully absorb the spillover without adverse consequences. Overall, the paper highlights the importance of financial spillovers in explaining corporate sector outcomes.
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