Supply Chain Concentration and Cost of Capital

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