Optimal Capital Structure, Relation-Specific Investment, and Supplier Competition
University of South Carolina - Moore School of Business
March 30, 2011
Midwest Finance Association 2012 Annual Meetings Paper
This paper studies the relationship between firm leverage and supplier market structure by examining their joint impacts on bargaining and relation-specific investments. We find that firm leverage decreases with the degree of competition among suppliers. Specifically, leverage decreases with the elasticity of substitution between suppliers. Leverage also decreases with the number of suppliers when the elasticity of substitution is high, and increases with the number of suppliers when the elasticity is low. Empirical evidence supports these model predictions. We find that firm leverage is positively related to the number of supplying industries, and negatively related to the average number of suppliers per supplying industry. Moreover, we find that firm leverage is positively related to the degree of input goods heterogeneity.
Number of Pages in PDF File: 55
Keywords: Capital structure, supplier, bargaining
JEL Classification: L14, G32working papers series
Date posted: June 15, 2011
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