International Sourcing and Capital Structure: Evidence from U. S. Manufacturing Firms

Abstract

Motivated by the rising importance of international sourcing in recent years, in this paper we examine the relation between international sourcing and capital structure using a sample of U.S. manufacturing firms that source intermediate inputs and/or final outputs from international suppliers. In doing so, we first estimate the level of international sourcing based on the U.S. input-output accounts and import data, and then empirically estimate the relation between the international sourcing level and the debt ratio. The key findings of our paper include: First, our regression analysis shows that there exists a negative and statistically significant relation between the level of international sourcing and the debt ratio. This negative relation is particularly strong for R&D intensive firms. These findings are consistent with the view that sourcing firms choose a lower financial leverage to induce overseas suppliers to make relationship-specific (RS) investments. Second, the negative relation is mitigated for firms sourcing proportionately more final outputs than intermediate inputs from international suppliers. The negative relation is also mitigated when sourcing from countries with better legal environments. Overall, our findings indicate that firms' operational and financial decisions should be examined simultaneously.