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.