Corporate Capital Structure and the Characteristics of Suppliers and Customers

Abstract

We investigate the link between a firm's leverage and the characteristics of its suppliers and customers. First, we test the hypothesis that firms use decreased leverage as a commitment mechanism to induce suppliers/customers to undertake relationship-specific investments. We find that the firm's leverage is negatively related to the R&D expense intensity in its supplier and customer industries, and the R&D intensity of its key suppliers and customers. We also find lower debt levels for firms operating in industries where strategic alliances and joint ventures with firms in supplier and customer industries are more prevalent. Further, our results suggest that the firm's leverage and the R&D investments of its key suppliers and customers are simultaneously determined. Finally, consistent with the use of debt as a bargaining tool, we find a positive relation between firm debt level and the degree of concentration in supplier/customer industries.

Keywords: Capital structure, Relationship-specific Investments, Seller power, Buyer power

JEL Classification: G32, G33, D43, L13, L2