Supply chain concentration and cost of capital

Abstract

AbstractThis study examines the impact of supply chain concentration on a firm's financing costs. We show purchasing firms with multiple supplier relationships are subject to higher information asymmetry and cost of equity. This effect is more pronounced when the supplier's financial performance deteriorates. We also find that lower supply chain concentration increases a firm's cost of debt. We believe that the purchaser's supply chain represents a source of material private information and that investors require a higher rate of return as compensation for increased information asymmetry. Our results are robust to combining the suppliers producing similar output and endogeneity issues.