Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry

American Economic Journal: Microeconomics, Forthcoming

AFA 2008 New Orleans Meetings Paper

9th Annual Texas Finance Festival Paper

44 Pages Posted: 18 Mar 2007 Last revised: 22 Jul 2010

Date Written: July 2010

Abstract

This paper examines whether debt financing can undermine a supermarket firm's incentive to provide product quality. In the supermarket industry, product availability is an important measure of a retailer's quality. Using U.S. consumer price index microdata to track inventory shortfalls, I find that taking on high financial leverage increases shortfalls. Highly leveraged firms appear to be degrading their products' quality in order to preserve current cash flow for debt service. Although reducing quality can erode both current sales and customer loyalty, firms appear to be willing to risk these outcomes in order to achieve benefits associated with debt finance.

Keywords: debt, financial constraint, inventory management, stockout, leveraged buyout

JEL Classification: D21, G31, G32, G34, L81, M31

Suggested Citation

Matsa, David A., Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry (July 2010). AFA 2008 New Orleans Meetings Paper; American Economic Journal: Microeconomics, Forthcoming; AFA 2008 New Orleans Meetings Paper; 9th Annual Texas Finance Festival Paper. Available at SSRN: https://ssrn.com/abstract=970790

David A. Matsa (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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