# The long-term and short-term effects of interest rate volatility on corporate bankruptcy risk: An industry and supply chain perspective

## TL;DR

This study shows how interest rate changes affect corporate bankruptcy risk through supply chain and industry dynamics, not just credit costs.

## Contribution

The paper identifies behavioral changes in corporate financing and industry overcapacity as key drivers of bankruptcy risk under interest rate volatility.

## Key findings

- Short-term interest rate increases push firms to use supply chain financing, risking financial stability.
- Long-term high interest rates worsen industry overcapacity and disrupt production-sales balance.
- Policy recommendations emphasize managing short-term credit bubbles and optimizing industrial structure.

## Abstract

While higher interest rates increase the cost of credit financing for businesses, this study finds that the direct impact of this traditional credit transmission mechanism on corporate bankruptcy risk is limited. Instead, our research reveals that changes in corporate behavior induced by rising debt financing costs are the root cause of bankruptcy risk. In the short term, an increase in interest rates drives businesses to substitute supply chain financing for credit financing in pursuit of profit maximization. This mismatch of short-term debt and long-term investments undermines the sustainability of the supply chain, ultimately reducing financial security—sacrificing safety for profitability. In the long term, higher interest rates exacerbate the overcapacity problem in industries, increasing the unsustainability of the production and sales balance. Using data from China’s construction industry, this study empirically tests these findings and, based on the main conclusions, provides policy suggestions regarding the long- and short-term effects of monetary policy on the sustainable development of China’s construction industry: (1) focus on short-term interest rate risks and be vigilant against commercial credit bubbles; (2) long-term monetary policy should prioritize industrial structure optimization.