Supply Chain, Product Pricing, and Capital Structure

Abstract

This paper examines how firms’ reliance on the supply chain affects capital structure decision via suppliers’ product pricing. In the model firms’ reliance on a supply chain delivers either a hedge effect or a risk-amplification effect, depending on the direction and magnitude of product demand correlations between firms along the supply chain. The risk-amplification (hedge) effect makes firms lower (increase) their leverage, pay more (less) interest for debt use, and take a more conservative (active) leverage adjustment policy. Our model further captures several supply-chain-specific phenomena; e.g., the EBIT bullwhip, risk propagation, and the supplier-driven vertical spillover effect.

Keywords: Leverage; Product Price; Supply Chain; Vertical Spillover; Bullwhip