Financial Leverage and Bargaining Power With Suppliers: Evidence from Leveraged Buyouts
46 Pages Posted: 6 Oct 2005 Last revised: 26 Jun 2015
Date Written: October 15, 2008
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: Suggested Citation