Financial Leverage and Bargaining Power With Suppliers: Evidence from Leveraged Buyouts

46 Pages Posted: 6 Oct 2005 Last revised: 26 Jun 2015

See all articles by David T. Brown

David T. Brown

University of Florida - Department of Finance, Insurance and Real Estate

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business

Date Written: October 15, 2008

Abstract

This paper investigates whether leveraged buyouts (LBOs) increase the bargaining power of firms with their suppliers. We find that suppliers to LBO firms experience significantly negative abnormal returns at the announcements of downstream LBOs. We also find that suppliers who have likely made substantial relationship-specific investments are more negatively affected, both in terms of abnormal stock returns and reduced profit margins, than suppliers of commodity products or transitory suppliers. Interestingly, leveraged recapitalization announcements are not associated with negative returns to suppliers, suggesting that increased leverage without an accompanying change in organizational form does not, on average, lead to price concessions from suppliers.

Keywords: Buying Power, Leveraged Buyout, Suppliers

JEL Classification: G32, G34

Suggested Citation

Brown, David T. and Fee, C. Edward and Thomas, Shawn, Financial Leverage and Bargaining Power With Suppliers: Evidence from Leveraged Buyouts (October 15, 2008). AFA 2007 Chicago Meetings Paper, Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market, Journal of Corporate Finance, Vol. 15, 2009, Available at SSRN: https://ssrn.com/abstract=813025 or http://dx.doi.org/10.2139/ssrn.813025

David T. Brown

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-2820 (Phone)
352-392-0301 (Fax)

C. Edward Fee (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business ( email )

246 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1648 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~shthomas/index.htm

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