Supply chain, product pricing, and dynamic capital structure

Chang-Chih Chen, Henry Hongren Huang and Chun I. Lee

International Review of Economics & Finance, 2022, vol. 80, issue C, 938-952

Abstract: 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.

Keywords: Leverage; Product price; Supply chain; Vertical spillover; Bullwhip effect (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:80:y:2022:i:c:p:938-952

DOI: 10.1016/j.iref.2022.03.001

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