Working Paper: NBER ID: w20579
Authors: S. Katie Moon; Gordon M. Phillips
Abstract: We examine the impact of outside purchase contracts on firm risk and firm capital structure. We find that firms with more outside purchase contracts have less risky cash flows. Despite these less risky cash flows, firms with these contracts also have less financial leverage especially when they operate in high value-added industries. Examining firm financing decisions, we document that firms with more outside contracts are more likely to issue private securities. Our results are consistent with firms with more outside purchase contracts using less leverage to decrease the expected costs of financial distress on their explicit and implicit contracting parties.
Keywords: purchase contracts; firm risk; capital structure; financial leverage
JEL Codes: G31; G32; L1; L22; L23; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower leverage (G19) | less risky cash flows (G19) |
| outside purchase contracts (L14) | less risky cash flows (G19) |
| lower leverage (G19) | reduced expected costs of financial distress (G33) |
| reduced expected costs of financial distress (G33) | encourages investment in relationship-specific assets (G31) |
| outside purchase contracts (L14) | lower leverage (G19) |
| outside purchase contracts (L14) | shift in financing strategy (G32) |