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| Author: | Hennessy, C. A. Livdan, D. |
| Title: | Debt, bargaining, and credibility in firm-supplier relationships |
| Journal: | Journal of Financial Economics
2009 : SEP, VOL 93:3, p. 382-399 |
| Index terms: | debt bargaining contracts supply chain |
| Language: | eng |
| Abstract: | This article aims to find out what is the optimal leverage for a downstream company that relies on implicit supplier contracts. According to the findings of this paper, the firm is able to increase its share of total surplus by performing a leveraged recapitalization prior to bargaining. This however, leads to debt overhang which limits the amount of credible bonuses. The model shows a leverage increase with supplier bargaining power and decrease with the use of non-verifiable inputs. Optimal financial structure is a trade-off between bargaining benefits and inefficiency caused by debt overhang. |
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