Debt in Tiered-Production Networks /

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Bibliographic Details
Author / Creator:Charoenwong, Ben, author.
Ann Arbor : ProQuest Dissertations & Theses, 2017
Description:1 electronic resource (116 pages)
Format: E-Resource Dissertations
Local Note:School code: 0330
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Other authors / contributors:University of Chicago. degree granting institution.
Notes:Advisors: Amit Seru; Gregor Matvos Committee members: Zhiguo He; Bryan Kelly.
Dissertation Abstracts International, Volume: 78-12(E), Section: A.
Summary:Firms simultaneously choose sourcing and capital structure, forming a production network and imbuing it with credit risk. When firms increase leverage, they offload the increased financial risk by diversifying their supply. Suppliers that default do not deliver products to customers, so risky debt upstream reduces expected production downstream. The risky debt and supplier reliance introduce debt overhang in tiered production. The overhang affects equilibrium pricing within the network and decreases the aggregate firm value relative to a riskless benchmark. Because of the network structure, increasing competition among suppliers generates ambiguous effects on final output and may not alleviate the debt-overhang problem. Empirically, I instrument for changes in leverage with changes in corporate tax rates and find a 1.4-percentage-point increase in leverage leads to a 10% higher chance of adding an additional supplier.