Capital Structure Along the Supply Chain: How Does Customer Leverage Affect Supplier Leverage Decisions?

26 Pages Posted: 15 Jun 2011 Last revised: 28 Nov 2014

Yongqiang Chu

University of South Carolina - Darla Moore School of Business

Liying Wang

University of Nebraska - Lincoln

Date Written: November 10, 2014

Abstract

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.

Keywords: Capital structure, supply chain, customers

JEL Classification: L14, G32

Suggested Citation

Chu, Yongqiang and Wang, Liying, Capital Structure Along the Supply Chain: How Does Customer Leverage Affect Supplier Leverage Decisions? (November 10, 2014). Available at SSRN: https://ssrn.com/abstract=1864183 or http://dx.doi.org/10.2139/ssrn.1864183

Yongqiang Chu (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
803-777-5960 (Phone)

Liying Wang

University of Nebraska - Lincoln ( email )

7600 Kennelley Drive
Lincoln, NE Nebraska 68516
United States

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