Risk Sharing Supplier Relationships and Investment Financing Decisions

51 Pages Posted: 8 Dec 2012 Last revised: 29 Sep 2019

See all articles by Stefanie Schraeder

Stefanie Schraeder

Department of Finance, University of Vienna

Date Written: September 1, 2019

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, Risk Sharing Supplier Relationships and Investment Financing Decisions (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=2186419 or http://dx.doi.org/10.2139/ssrn.2186419

Stefanie Schraeder (Contact Author)

Department of Finance, University of Vienna ( email )

Vienna
Austria
+4367760776378 (Phone)

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