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

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.