Upstream propagation of shocks in supply chains: Evidence from earthquakes

Abstract We investigate how natural disaster shocks to customers propagate upstream to suppliers’ investment. Using data from the major customers of Chinese listed firms and earthquake information during 2009–2019, we investigate the impact of customers’ earthquake exposure on corporate investment. We find that firms significantly reduce investment after their customers experience earthquakes, particularly for non‐state‐owned enterprises, firms with higher product uniqueness, firms in competitive industries, and firms in nondurable goods industries. Furthermore, our analysis highlights firms’ sales as one of the potential channels through which customers’ earthquake exposure influences firm investment. We also find that following an earthquake supplier firms reduce their transactions with the affected customers and develop alternative customers.