Does the Proximity of Principal Customers Affect Suppliers’ Capital Structures?

54 Pages Posted: 17 Oct 2012 Last revised: 4 Jan 2013

Patrick Goettner

Karlsruhe Institute of Technology

Peter Limbach

University of Cologne and Centre for Financial Research (CFR)

Date Written: January 3, 2013

Abstract

This study examines how the capital structure of supplying firms is affected by their principal customers’ geographical proximity. As the costs of information acquisition, communication, and monitoring generally increase with distance, suppliers’ uncertainty regarding their customers’ business and sales contribution will increase with distance as well. Hence, we document a significant inverse relation between suppliers’ leverage and their headquarter-to-headquarter distance to customers. Our findings suggest that customer-driven business risk induces firms to lower their risk in the balance sheet. Results are in line with contagion effects of customer distress on suppliers (Hertzel et al. 2008) and stand a battery of robustness tests including controls for accounting standards, competition, locations of non-headquarter offices, political stability, and estimating systems of simultaneous equations.

Keywords: business risk, capital structure, geographic proximity, information and monitoring costs, principal customers

JEL Classification: G30, G34, L14

Suggested Citation

Goettner, Patrick and Limbach, Peter, Does the Proximity of Principal Customers Affect Suppliers’ Capital Structures? (January 3, 2013). Available at SSRN: https://ssrn.com/abstract=2162765 or http://dx.doi.org/10.2139/ssrn.2162765

Patrick Goettner

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany
+49/72160843831 (Phone)

HOME PAGE: http://finance.fbv.kit.edu

Peter Limbach (Contact Author)

University of Cologne and Centre for Financial Research (CFR) ( email )

Albertus-Magnus-Platz
Köln, 50923
Germany

HOME PAGE: http://www.finance.uni-koeln.de

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