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Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry

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  • David A. Matsa

Abstract

This paper examines whether debt financing can undermine a supermarket firm's incentive to provide product quality. In the supermarket industry, product availability is an important measure of a retailer's quality. Using US consumer price index microdata to track inventory shortfalls, I find that taking on high financial leverage increases shortfalls. Highly leveraged firms appear to be degrading their products' quality in order to preserve current cash flow for debt service. Although reducing quality can erode both current sales and customer loyalty, firms appear to be willing to risk these outcomes in order to achieve benefits associated with debt finance. (JEL D92, G31, G32, L15, L81)

Suggested Citation

  • David A. Matsa, 2011. "Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 137-173, February.
    • Handle: RePEc:aea:aejmic:v:3:y:2011:i:1:p:137-73
    Note: DOI: 10.1257/mic.3.1.137
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry (AEJ:MI 2011) in ReplicationWiki

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