Chapter 1. Buyer-Supplier Relationships and the Stakeholder Theory of Capital Structure:...[ Read more ]

Chapter 1. Buyer-Supplier Relationships and the Stakeholder Theory of Capital Structure:

Leverage affects a firm's liquidation decision and may therefore affect the value of relation-specific investments made by the firm's stakeholders (Titman, 1984). As a result, firms may want to maintain lower debt ratios if stakeholder relationships are especially important. We compile a database of firms' principal customers (those that account for at least 10% of sales or are otherwise considered important for business) from the Business Information File of Compustat 98 and test the predictions of this theory. We argue that a firm with suppliers that rely heavily on its purchases ("dependent suppliers") is likely to be particularly concerned about the effect its leverage ratio may have on the supplier firms' incentives to make specific investments. Consistent with our expectation, we find that the customers' leverage ratios are lower if their purchases from "dependent suppliers" constitute a higher proportion of their cost of goods sold. Moreover, consistent with Titman (1984) and Titman and Wessels (1988), only the proportion of purchases from suppliers in industries producing specialized products (where specific investments are likely to be more important) drives this result.We also examine whether the supplier's leverage ratios are affected by the presence of principal customers. We find evidence of a negative relationship between the supplier's leverage ratio and the proportion of sales to principal customers; however, again, this result only holds for suppliers in industries producing specialized products. Additional results suggest that firms producing specialized products maintain lower leverage to attenuate potential stakeholder-driven costs associated with the loss of principal customers. Our results are not supportive of the view that principal customers exploit their bargaining power to impose lower debt ratios on the dependent suppliers.

Chapter 2. Buyer-Supplier Relationships and Trade Credit:

We create a database of supplier firms' principal customers from Compustat's Business Information File and examine the impact of principal customers on the provision of trade credit. The supplier firms' accounts receivable scaled by sales decreases in the proportion of sales accounted for by principal customers. This is consistent with the financing advantage or price-discrimination theories of trade credit, but less consistent with theories that view trade credit as a general subsidy to all customers to promote sales, as a guarantee of product quality, or as a manifestation of customer bargaining power. The underlying relationship, however, is non-linear, suggesting that transactions motives also affect trade credit. Long-term principal customers pay more promptly when the suppliers are in financial distress, suggesting the value of durable relationships. Accounts payable are also affected by the proportion of sales to principal customers - which suggests that firms match the maturity structure of their assets and liabilities by letting payables policy be determined, in part, by their receivables. Bigger firms offer more trade credit and also pay more promptly: a proportionate increase in sales and asset size increases accounts receivable more than proportionately, and accounts payable less than proportionately. Both accounts receivable and accounts payable are affected by the supplier firm's inventory, leverage, cash flows and profit margin in a manner that is mainly consistent with the financing advantage, the price-discrimination and the transactions cost theories.