Supply chain, product pricing, and dynamic capital structure

This paper examines how firms' reliance on a supply chain affects their capital structure decisions via the suppliers' product pricing. In our model, a firms’ reliance on a supply chain results in either a risk-amplification effect or a hedge effect, depending on the direction and magnitud...

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Bibliographic Details
Published inInternational review of economics & finance Vol. 80; pp. 938 - 952
Main Authors Chen, Chang-Chih, Huang, Henry Hongren, Lee, Chun I.
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.07.2022
Subjects
Bullwhip effect
Leverage
Product price
Supply chain
Vertical spillover
Supply chain
Product price
Bullwhip effect
Leverage
Vertical spillover
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Summary:This paper examines how firms' reliance on a supply chain affects their capital structure decisions via the suppliers' product pricing. In our model, a firms’ reliance on a supply chain results in either a risk-amplification effect or a hedge effect, depending on the direction and magnitude of product demand correlations between firms along the supply chain. The risk-amplification (hedge) effect leads firms to reduce (increase) their leverage, pay a higher (lower) interest rate for debt, and take a more conservative (aggressive) leverage adjustment policy. Our model further captures several supply-chain-specific phenomena such as the EBIT bullwhip, risk propagation, and the supplier-driven vertical spillover effect.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2022.03.001