Corporate Leverage and Specialized Investments by Customers and Suppliers

9 Pages Posted: 18 Dec 2008

See all articles by Jayant R. Kale

Jayant R. Kale

Georgia State University

Husayn K. Shahrur

Bentley University - Department of Finance


A company's performance in the product market depends in part on the willingness of its suppliers and customers to invest in the relationship - to make specialized investments of human as well as financial capital that may have no value outside that relationship. Consistent with Stewart Myer's concept of debt overhang and underinvestment, the authors hypothesize that companies can encourage their suppliers and other key stakeholders to make such specialized investments by limiting their use of debt financing, thereby addressing their stakeholders' concerns about their long-term performance and staying power.

In this article, the authors report the findings of a recently published study of a sample of U.S. industrial companies during the period 1984-2003. Using the benchmark input-output accounts for the U.S. economy, the authors identified supplier and customer industries for each company in their sample while also collecting data on the firms actual suppliers and customers from Compustat's segment files. Using empirical proxies for the intensity of specialized investments, they find that companies that operate in environments requiring specialized investments by suppliers and customers tend to operate with lower levels of debt. At the same time, the authors report evidence suggesting that the suppliers and customers of highly leveraged companies make lower levels of specialized investment than the suppliers and customers of less leveraged firms.

Suggested Citation

Kale, Jayant Raghunath and Shahrur, Husayn K., Corporate Leverage and Specialized Investments by Customers and Suppliers. Journal of Applied Corporate Finance, Vol. 20, Issue 4, pp. 98-104, Fall 2008, Available at SSRN: or

Jayant Raghunath Kale (Contact Author)

Georgia State University ( email )

Robinson College of Business
University Plaza
Atlanta, GA 30303-3083
United States
404-413-7345 (Phone)
404-413-7312 (Fax)

Husayn K. Shahrur

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

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