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Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry


David A. Matsa


Northwestern University - Kellogg School of Management

July 2010

American Economic Journal: Microeconomics, Forthcoming
AFA 2008 New Orleans Meetings Paper
9th Annual Texas Finance Festival Paper

Abstract:     
This paper examines whether debt financing can undermine a supermarket firm's incentive to provide product quality. In the supermarket industry, product availability is an important measure of a retailer's quality. Using U.S. consumer price index microdata to track inventory shortfalls, I find that taking on high financial leverage increases shortfalls. Highly leveraged firms appear to be degrading their products' quality in order to preserve current cash flow for debt service. Although reducing quality can erode both current sales and customer loyalty, firms appear to be willing to risk these outcomes in order to achieve benefits associated with debt finance.

Number of Pages in PDF File: 44

Keywords: debt, financial constraint, inventory management, stockout, leveraged buyout

JEL Classification: D21, G31, G32, G34, L81, M31

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Date posted: March 18, 2007 ; Last revised: July 22, 2010

Suggested Citation

Matsa, David A., Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry (July 2010). AFA 2008 New Orleans Meetings Paper; American Economic Journal: Microeconomics, Forthcoming; AFA 2008 New Orleans Meetings Paper; 9th Annual Texas Finance Festival Paper. Available at SSRN: http://ssrn.com/abstract=970790

Contact Information

David A. Matsa (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)
Feedback to SSRN (Beta)


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