Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry
David A. Matsa
Northwestern University - Kellogg School of Management
American Economic Journal: Microeconomics, Forthcoming
AFA 2008 New Orleans Meetings Paper
9th Annual Texas Finance Festival Paper
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, M31Accepted Paper Series
Date posted: March 18, 2007 ; Last revised: July 22, 2010
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