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Does vertical integration reduce the cost of equity?

Author

Listed:
  • Yu, Haipeng
  • Cheng, Xiaoke
  • Sun, Qian
  • Shen, Xiaotian

Abstract

Faced with the increasing risk of supply chain disruption, more firms are using mergers and acquisitions or investments to expand their core business's upstream and downstream supply chain and improve their vertical integration. In this vertical integration trend, the cost of capital for core firms is crucial to coordinating the entire supply chain. We manually collected input-output matrix data of segmented departments and supply chain value-added data to explore how vertical integration impacts the cost of equity. Using A-share listed firms from 2008 to 2021 as our sample, the results of our regression analyses show that vertical integration plays a significant role in reducing the cost of equity. These results remain consistent throughout a series of robustness tests. The channel tests indicate that vertical integration can reduce the cost of equity by reducing operating risk and mitigating information asymmetry. Additional analyses show that vertical integration's impact on the cost of equity is more pronounced for firms with more intense industry competition, lower product market positions, lower supply chain concentration, weaker corporate governance, and more aggressive strategies, as well as firms in regions with lower marketization processes and weaker trust environment. Our findings contribute to the literature on the economic consequences of vertical integration from the perspective of corporate financing behavior and extend the literature on cost of equity determinants to the field of supply chains.

Suggested Citation

  • Yu, Haipeng & Cheng, Xiaoke & Sun, Qian & Shen, Xiaotian, 2025. "Does vertical integration reduce the cost of equity?," International Review of Financial Analysis, Elsevier, vol. 97(C).
  • Handle: RePEc:eee:finana:v:97:y:2025:i:c:s1057521924007439
    DOI: 10.1016/j.irfa.2024.103811
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    More about this item

    Keywords

    Vertical integration; The cost of equity; Operating risk; Information asymmetry; Supply chain;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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