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The effect of social connections on capital structure in supplier-customer relationships11We are grateful for the helpful comments from Jason Damm, Abhi Ganguly, Scott Hsu, Ankit Kalda, Wayne Lee, Paul Obermann, Craig Rennie, Ivan Rodriguez, two anonymous referees, an anonymous Associate Editor, the Editor (Kristine Hankins), participants at the 2019 Midwest Finance Association (MFA) conference, 2019 Eastern Finance Association (EFA) conference, 2019 Financial Management Association (FMA), 2021 Southwest Finance Symposium, 2021 Southern Finance Association (SFA) conference and seminar participants at the University of Arkansas. All errors are our own

Author

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  • Jandik, Tomas
  • Salikhova, Tatiana

Abstract

Suppliers socially connected to major customers with relation-specific investments have higher leverage ratios compared to unconnected suppliers. The presence of connections partially reduces supplier underleverage observed in supplier-customer relationships with relation-specific investments. Consistent with the role of connections in bonding trading parties' commitment, connections to major customers help to increase customer purchases, and supplier leverage increases are primarily observed in firms with high intensity of customer purchases. Additionally, connected suppliers are associated with higher leverage primarily when information asymmetry between parties is high. Overall, connections help strengthening implicit contracts through establishing trust between trading parties.

Suggested Citation

  • Jandik, Tomas & Salikhova, Tatiana, 2023. "The effect of social connections on capital structure in supplier-customer relationships11We are grateful for the helpful comments from Jason Damm, Abhi Ganguly, Scott Hsu, Ankit Kalda, Wayne Lee, Pau," Journal of Corporate Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:corfin:v:79:y:2023:i:c:s0929119923000019
    DOI: 10.1016/j.jcorpfin.2023.102352
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    More about this item

    Keywords

    Social connections; Capital structure; Relation-specific investments; Implicit contracts;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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