Supplier Concentration and Speed of Capital Structure Adjustment

Abstract

Using a large sample of A-share Chinese firms from 2013 to 2019, we show a positive relationship between supplier concentration and firms' leverage adjustment speed. This positive relationship is uni-directional, primarily concentrated among over-leveraged firms rather than under-leveraged ones. Moreover, the effect of supplier concentration is concentrated in non-state-owned firms and firms with more bargaining power toward their suppliers. The plausible channel is the monitoring role imposed by suppliers, which mitigates agency conflicts and reduces leverage adjustment costs. We further show that firms with higher supplier concentration are more active in security market activities because of the lower financial frictions. Our findings demonstrate the crucial role of supplier-customer relationships in the firm's capital structure dynamics.

Keywords: supplier concentration, capital structure adjustment, monitoring role, agency conflict

JEL Classification: G30, G32