Does customer extreme heat exposure affect default risk of suppliers?

This article explores whether suppliers adapt to climate shocks experienced by their customers. Using daily meteorological data from Chinese weather stations for 2009 to 2019, we construct a temperature-based extreme heat exposure index and assign it to customers based on geographic proximity. We propose competing hypotheses regarding whether customer heat exposure increases or decreases supplier default risk, and our empirical results support the adaptation hypothesis: suppliers’ default risk is significantly negatively associated with customers’ exposure to extreme heat. Enhanced risk management practices and accelerated green upgrading are identified as the two main mechanisms. This effect is more pronounced when suppliers are in regions with higher marketization and lower economic policy uncertainty and when customers operate in non-climate-sensitive industries. Our findings illustrate how firms proactively adapt and adjust in response to the uncertainty induced by climate shocks affecting their supply chain partners.