Capital Structure Along the Supply Chain: How Does Customer Leverage Affect Supplier Leverage Decisions?
University of South Carolina - Darla Moore School of Business
University of Nebraska - Lincoln
November 10, 2014
This paper examines the relationship between a firm's leverage and that of its customers. We find that a firm's leverage is positively associated with its customer's leverage. We show that the positive leverage relationship is not driven by unobservable local and industry-specific shocks. To establish causality, we run two-stage least squares regressions with the customer's idiosyncratic volatility as the instrument for customer leverage and find that the results remain robust. Furthermore, consistent with the bargaining theory of capital structure, we find that the positive leverage relationship is stronger when the customer has higher ex-ante bargaining power.
Number of Pages in PDF File: 26
Keywords: Capital structure, supply chain, customers
JEL Classification: L14, G32
Date posted: June 15, 2011 ; Last revised: November 28, 2014
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