Does Customer Risk Affect Suppliers' Capital Structure Decisions?
56 Pages Posted: 30 Dec 2015 Last revised: 20 Nov 2016
Date Written: September 2, 2016
This paper investigates the impact of customer risk on suppliers' capital structure. My results show that, on average, high customer risk is associated with low supplier leverage. Customer risk is an important determinant of suppliers' method of financing, as well. Conditional on raising external financing, suppliers with high-risk customers are more likely to choose equity over debt. My time series analysis results suggest a significant decline in suppliers' leverage and net debt issuance activity following an increase in their major customers' risk. Consistent with a risk transfer story, customer credit rating changes are followed by changes in supplier credit ratings.
Keywords: Capital structure, stakeholder theory, business risk
JEL Classification: G32, L22
Suggested Citation: Suggested Citation