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Customer-Supplier relationships and the cost of debt

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  • Cai, Kelly
  • Zhu, Hui

Abstract

We study whether the presence of major customer-supplier relationships affects a supplier's cost of debt. Using 5,704 U.S. corporate bonds issued from 1983 to 2013, we find that the cost of debt tends to be reduced when there are major customer-supplier relationships. This finding is robust to alternative measures of major customer-supplier relationships, subsample analyses, a propensity score matched sample analysis, and an instrumental variables approach. The results are consistent with the certification hypothesis, where a major customer serves as a monitoring and certifying entity for its supplier, thereby reducing information asymmetry between the supplier and its creditors. Moreover, the supplier's cost of debt is further reduced if the issuing supplier has higher asset specificity, whereas suppliers in more competitive industries do not incur the benefits of the validation.

Suggested Citation

  • Cai, Kelly & Zhu, Hui, 2020. "Customer-Supplier relationships and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:jbfina:v:110:y:2020:i:c:s0378426619302602
    DOI: 10.1016/j.jbankfin.2019.105686
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