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Investment Financing through Risk Sharing Supplier Relationships

50 Pages Posted: 8 Dec 2012 Last revised: 10 Jan 2014

Stefanie Schraeder

University of New South Wales

Date Written: December 1, 2013

Abstract

This paper investigates the effects of risk sharing supplier relationships on the profitability and cost of capital of a new investment project. We compare the three possibilities of not investing in the project, bearing the project risk alone and sharing the risk with a supplier. We find that firms enter risk sharing contracts with a supplier if there is a mismatch between the capital available and the capital needed for financing a new investment opportunity. A low leverage ratio on the supplier's side abets the profitability of risk sharing - making a low debt ratio a competitive advantage for the supplier. Moreover, we show that the equity cost of capital for the project can decrease especially for high risk and highly pro table projects.

Keywords: supplier relationships, risk sharing contract, investment financing, cost of capital, optimal capital structure

Suggested Citation

Schraeder, Stefanie, Investment Financing through Risk Sharing Supplier Relationships (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=2186419 or http://dx.doi.org/10.2139/ssrn.2186419

Stefanie Schraeder (Contact Author)

University of New South Wales ( email )

Sydney, NSW 2052
Australia

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