Capital Structure Decisions Along the Supply Chain: Evidence from Import Competition

Abstract

This paper studies the propagation of import competition shock along the supply chain which leads firms to alter their capital structure. We find that a large reduction in import tariffs in a customer industry induces suppliers to choose more conservative financial policies via transmission of contraction and distress risk. We show that firms lower their leverage more when they are involved in higher relationship-specific investments with their customers and when they are more concerned about distress, and that firms adjust their leverage, mainly by issuing more equity. Firms also increase their cash holdings and limit their trade credit provision.

Keywords: customers, leverage, import competition

JEL Classification: D43, F12, G32, G33, L22