Supply Chain Concentration and Cost of Capital

49 Pages Posted: 3 Mar 2020

See all articles by James Upson

James Upson

University of Texas at El Paso

Chao Wei

University of Texas at El Paso

Date Written: December 1, 2019

Abstract

This study examines the impact of supply chain concentration on firm’s financing costs. We show that purchasing firms engaging in multiple supplier relationships are subject to higher firm risk and cost of equity. This effect is more pronounced when the supplier’s financial performance deteriorates or when the purchasing firm’s purchase demand is large. We also provide evidence that lower supply chain concentration increases firm’s cost of debt. Lenders charge higher interest rate on the bank loans to compensate for additional risk implied from managing multiple supplier relationships, in particular when the loan is unsecured. Finally, our results are robust to combining the suppliers producing similar output and endogeneity issues.

Keywords: Supplier Concentration, Cost of Equity, Cost of Debt

JEL Classification: G12, G32

Suggested Citation

Upson, James and Wei, Chao, Supply Chain Concentration and Cost of Capital (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3532089 or http://dx.doi.org/10.2139/ssrn.3532089

James Upson

University of Texas at El Paso ( email )

500 West University
El Paso, TX 79968-0545
United States

Chao Wei (Contact Author)

University of Texas at El Paso ( email )

500 W University Ave
El Paso, TX 79902
United States

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