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Supply chain, product pricing, and dynamic capital structure

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

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.

Suggested Citation

  • Chen, Chang-Chih & Huang, Henry Hongren & Lee, Chun I., 2022. "Supply chain, product pricing, and dynamic capital structure," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 938-952.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:938-952
    DOI: 10.1016/j.iref.2022.03.001
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    Cited by:

    1. Hupka, Yuri, 2022. "Leverage and the global supply chain," Finance Research Letters, Elsevier, vol. 50(C).
    2. Mieczysław Kowerski, 2022. "A number of capital structure models presented even in prominent papers are estimated with incorrect estimators," Bank i Kredyt, Narodowy Bank Polski, vol. 53(5), pages 475-496.

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