Does Customer Financial Risk Affect Suppliers’ Capital Structure Decisions?

This paper examines the impact of customer financial distress risk on the capital structure decisions of supplier firms. I hypothesize that customer financial distress risk causes suppliers to be more conservative in their use of debt financing, especially when the supplier is dependent on the customer. Empirical results show that there is a negative relationship between supplier leverage and various proxies for customer financial distress risk. Suppliers issue less debt when their major customers are financially less healthy compared to their average over the years that they are in relationship. I also find that suppliers choose financially more risky customers after major capital structure changes that relax their financial constraints (such as IPOs). Finally, on average, suppliers with low-rating customers are more likely to issue equity compared to those with high-rating customers during the first years of the relationship. Overall, results are consistent with customer financial distress risk affecting suppliers’ capital structure decisions.

This seminar is organised by the Erasmus Finance Group.