IDEAS home Printed from https://ideas.repec.org/a/oup/jleorg/v12y1996i2p461-79.html
   My bibliography  Save this article

Underinvestment, Debt Financing, and Long-Term Supplier Relations

Author

Listed:
  • Subramaniam, Venkat

Abstract

Prior studies have documented that in firm-supplier relations where the firm makes an investment up-front, the profits are exposed to expropriation by the supplier and result in underinvestment. We analyze such a firm-supplier relation in a bargaining framework and show that the bargaining power of the firm is positively related to the resale value of its investment and negatively related to the product-market surplus generated by the investment. In this scenario, debt financing is advantageous to the firm since since it shields some wealth away from the supplier. We also demonstrate that allowing the firm to issue debt and retire equity subsequent to the investment decision mitigates the underinvestment problem. This result obtains even when the debtholders are forced to participate in the negotiations. However, this efficiency property of debt is lost if the investment is made by the supplier and not by the firm. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Subramaniam, Venkat, 1996. "Underinvestment, Debt Financing, and Long-Term Supplier Relations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(2), pages 461-479, October.
    • Handle: RePEc:oup:jleorg:v:12:y:1996:i:2:p:461-79
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 84-111.
    2. Brown, David T. & Fee, C. Edward & Thomas, Shawn E., 2009. "Financial leverage and bargaining power with suppliers: Evidence from leveraged buyouts," Journal of Corporate Finance, Elsevier, vol. 15(2), pages 196-211, April.
    3. Kim, Jeong-Bon & Song, Byron Y. & Zhang, Yue, 2015. "Earnings performance of major customers and bank loan contracting with suppliers," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 384-398.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:jleorg:v:12:y:1996:i:2:p:461-79. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/jleo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.