Buyer-Supplier Relationships and the Stakeholder Theory of Capital Structure

53 Pages Posted: 11 Mar 2005

See all articles by Shantanu Banerjee

Shantanu Banerjee

Lancaster University - Management School

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Yungsan Kim

Hanyang University

Date Written: March 2007

Abstract

Leverage affects a firm's liquidation decision and may therefore affect the value of relation-specific investments made by the firm's stakeholders (Titman, 1984). As a result, firms may want to maintain lower debt ratios if stakeholder relationships are especially important. We compile a database of firms' principal customers (those that account for at least 10% of sales or are otherwise considered important for business) from the Business Information File of Compustat 98 and test the predictions of this theory. We argue that a firm with suppliers that rely heavily on its purchases ("dependent suppliers") is likely to be particularly concerned about the effect its leverage ratio may have on the supplier firms' incentives to make specific investments. Consistent with our expectation, we find that the customers' leverage ratios are lower if their purchases from "dependent suppliers" constitute a higher proportion of their cost of goods sold. Moreover, consistent with Titman (1984) and Titman and Wessels (1988), only the proportion of purchases from suppliers in industries producing durable products (where specific investments are likely to be more important) drives this result. We also examine whether the supplier's leverage ratios are affected by the presence of principal customers. We find evidence of a negative relationship between the supplier's leverage ratio and the proportion of sales to principal customers; however, again, this result only holds for suppliers in industries producing durable products. Additional results suggest that firms producing durable products maintain lower leverage to attenuate potential stakeholder-driven costs associated with the loss of principal customers.

Keywords: Capital Structure, Stakeholder Theory, Principal Customers

JEL Classification: G32, L22

Suggested Citation

Banerjee, Shantanu and Dasgupta, Sudipto and Kim, Yungsan, Buyer-Supplier Relationships and the Stakeholder Theory of Capital Structure (March 2007). Available at SSRN: https://ssrn.com/abstract=607582 or http://dx.doi.org/10.2139/ssrn.607582

Shantanu Banerjee

Lancaster University - Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Yungsan Kim

Hanyang University ( email )

Seoul 133-791
Korea

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,002
Abstract Views
5,505
rank
26,431
PlumX Metrics