Government, defence-specific products, and suppliers' financial decisions. Evidence from Spain

Using data on defence-related firms in Spain, this study investigates how sales to the Ministry of Defence shape corporate leverage decisions. The paper contributes to the literature by analysing a regulated industry in which the primary customer is also the main regulator, creating a distinctive supplier–buyer relationship. We find that firms with defence sales adopt more conservative capital structures, with lower debt ratios that decline further as the share of defence sales increases. This effect is strongest in the early years of the commercial relationship, suggesting that regulatory scrutiny and solvency requirements play a stronger role at the outset and weaken as firms build performance records and relational capital. Robust analyses show that indirect (subcontracting) sales also reduce leverage, while neither R&D intensity nor export activity moderates these relationships. Overall, the evidence highlights the importance of procurement institutions and regulatory conditions in shaping suppliers’ financing behaviour. Results are robust to alternative specifications and methodology.