Abstract
Using a large sample of A-share Chinese firms from 2012 to 2019, we show a positive relationship between supplier concentration and leverage adjustment speed. This positive relationship is unidirectional and primarily concentrated among over-leveraged firms rather than among under-leveraged ones. Moreover, the effect of supplier concentration is more pronounced in firms with greater bargaining power over suppliers. A plausible channel is the monitoring role imposed by suppliers, which mitigates the firm’s agency conflicts by reducing (1) information asymmetry between informed managers and uninformed market participants and (2) management opportunism and slacking. Further, we show that firms with higher supplier concentrations are more active in the security market due to having lower agency costs. Our findings demonstrate the crucial role of customer–supplier relationships in a firm’s capital structure dynamics.
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