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Capital structure decisions along the supply chain: Evidence from import competition

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Abstract

This paper studies the spillover effect of import competition in downstream industries on upstream capital structure. We find that a large reduction in import tariffs in a customer industry induces suppliers to choose more conservative financial policies. We show that firms lower their leverage more when the customer–supplier relationship is more valuable to the firms and when firms are more vulnerable to the downstream shock. Finally, firms adjust their leverage mainly by issuing more equity.

Résumé

Cet article étudie l’effet de contagion de la concurrence des importations dans les industries en aval sur la structure du capital en amont. Nous constatons qu’une forte réduction des taxes d’importation dans un secteur client incite les fournisseurs à choisir des politiques financières plus conservatrices. Nous montrons que les entreprises réduisent davantage leur endettement lorsque la relation client-fournisseur est plus importante pour les entreprises et que les entreprises sont plus vulnérables à un choc situé en aval. Enfin, les entreprises ajustent leur endettement principalement en émettant davantage d’actions.

Resumen

Este artículo estudia el efecto de las repercusiones de la competencia de las importaciones en industrias derivadas en la estructura de capital ascendente. Encontramos que una gran reducción en los aranceles de importación en una industria de consumidores induce a los proveedores a elegir políticas financieras más conservadoras. Mostramos que las empresas disminuyen su apalancamiento más cuando la relación entre el consumidor y el proveedor es más valiosa para las empresas y cuando las empresas son más vulnerables al impacto posterior. Finalmente, las empresas ajustan su apalancamiento principalmente mediante la emisión de más capital.

Resumo

Este artigo estuda o efeito de transbordamento da concorrência de importações nas indústrias downstream na estrutura de capital upstream. Descobrimos que uma grande redução nas tarifas de importação em uma indústria de clientes induz fornecedores a escolher políticas financeiras mais conservadoras. Mostramos que as empresas reduzem sua alavancagem quando a relação cliente-fornecedor é mais valiosa para empresas e quando empresas são mais vulneráveis ao choque downstream. Por fim, empresas ajustam sua alavancagem principalmente emitindo mais capital.

摘要

本文研究了下游产业进口竞争对上游资本结构的溢出效应。我们发现, 客户行业的进口关税大幅下降会导致供应商选择更为保守的金融政策。我们表明, 当客户–供应商关系对公司更有价值而公司更容易受到下游冲击时, 公司会更多地降低杠杆率。最后, 公司主要通过发行更多股权来调整杠杆。

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ACKNOWLEDGEMENTS

We thank Lemma Senbet (the editor) and three anonymous referees for their constructive comments. We also thank Heitor Almeida, Ran Duchin (discussant), Fangjian Fu (discussant), Jarrad Harford, Erik Lie, Pedro Matos (discussant), Sheridan Titman, Philip Valta, and participants at the 2017 Financial Intermediation Research Society (FIRS) Conference, the 2016 CityU of Hong Kong International Finance Conference on Corporate Finance and Financial Markets, and the 2016 Asia–Pacific FMA conference for helpful suggestions and comments. We gratefully acknowledge financial support by a grant (CityU 21500314) from the Research Grants Council of the HKSAR Government and the City University of Hong Kong.

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Authors and Affiliations

  1. College of Business, City University of Hong Kong, Hong Kong, People’s Republic of China

    Qianqian Huang

  2. College of Business and Economics, Soongsil University, Seoul, South Korea

    Ryoonhee Kim

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  1. Qianqian Huang
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Correspondence to Qianqian Huang.

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Supplementary information accompanies this article on the Journal of International Business Studies website (www.palgrave.com/ journals).

Accepted by Lemma Senbet, Area Editor, 19 December 2018. This article has been with the authors for three revisions.

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Table 9 Variable definitions
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Huang, Q., Kim, R. Capital structure decisions along the supply chain: Evidence from import competition. J Int Bus Stud 50, 873–894 (2019). https://doi.org/10.1057/s41267-019-00225-9

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