Contracting with Nonfinancial Stakeholders and Corporate Capital Structure: The Case of Product Warranties

Kale, Jayant R.; Meneghetti, Costanza; Shahrur, Husayn

doi:10.1017/s002210901300029x

Cited by 29 publications

(23 citation statements)

References 35 publications

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“…This result shares a similar intuition with Kale et al. () who show that warranty offering firms increase financial risk (through higher debt levels) when distressed but lower debt in non‐distress periods.…”

Section: Discussion Of Resultssupporting

confidence: 87%

“…This would lead suppliers to increase RSI when risk-taking incentives to the customer firm accompany a shock. Kale et al (2013) provide a similar intuition-warranty offering firms increase (lower) debt and therefore financial risk when distressed (non-distress). The above arguments lead to the risk-taking hypothesis stated below:…”

Section: Background and Hypothesis Developmentmentioning

confidence: 83%

“…Kale et al. () provide a similar intuition—warranty offering firms increase (lower) debt and therefore financial risk when distressed (non‐distress). The above arguments lead to the risk‐taking hypothesis stated below:…”

Section: Background and Hypothesis Developmentmentioning

confidence: 86%

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CEO Incentives and Customer‐Supplier Relations

Sanders

Venkateswaran

2017

Production and Operations Management

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This study explores how suppliers adjust their relation‐specific investments (RSI) in response to the different risk‐taking incentives provided by the customer firm to its CEO, during normal and transition periods. We investigate this relation using 17,553 customer–supplier transactions over the 1993–2013 period. We find strong evidence consistent with the risk‐taking argument. Specifically, we find that an increase in the risk‐taking incentives of customer CEOs leads to a decline in suppliers’ RSI in normal periods, but an increase in RSI during transition periods. We employ the FAS‐123R mandate to show that an exogenous reduction in customer CEO's incentive pay increases suppliers’ RSI. We reaffirm the effect with the passage of the Sarbanes–Oxley Act as a secondary quasi‐natural experiment. Finally, we examine several scenarios that either amplify or attenuate the observed relation, based on factors such as financial constraints, distress, growth opportunities, industry competition, and other firm characteristics. Our study contributes to the literature that examines the interplay between corporate policy and product market relationships.

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Section: Discussion Of Resultssupporting

confidence: 87%

Section: Background and Hypothesis Developmentmentioning

confidence: 83%

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CEO Incentives and Customer‐Supplier Relations

Sanders

Venkateswaran

2017

Production and Operations Management

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“…Additionally, as in Kale et al (2013), we derive further results using book leverage as the dependent variable (defined in Table 2). Hypotheses 1, and 2b are supported by these results.…”

Section: Additional Testsmentioning

confidence: 99%

Young family firms: Financing decisions and the willingness to dilute control

Keasey

Martínez

Pindado

2015

Journal of Corporate Finance

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We study the relationship between leverage and the willingness of listed family firms to dilute control, proxied by the ownership of the main shareholder. We find that the main owner's stake positively impacts on leverage and that this impact is stronger when the business is a young family firm. Furthermore, the life cycle matters when analyzing this relationship. These results allow us to argue that owners with a greater stake prefer to raise finance via debt rather than dilute their position via equity, and that family firms face a trade-off between their control risk aversion and the need for external financing.

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“…More than 7,000 bankruptcy cases are filed annually under Chapter 11 of the US Bankruptcy Code for reorganization, with hundreds of thousands additional cases filed around the globe (Gerdano & Flynn, 2018; Xia, Dawley, Jiang, Ma, & Boal, 2016). Whether a firm can reemerge from bankruptcy proceedings can significantly impact various stakeholder groups (Altman, 1984; Cremers, Nair, & Peyer, 2008; Trahms, Ndofor, & Sirmon, 2013), including employees (Alaka, 2006; Bae, Kang, & Wang, 2011; Graham, Kim, Li, & Qiu, 2015; Ponoroff, 1994), suppliers (Benerjee, Dasgupta, & Kim, 2008; Boone & Ivanov, 2012; Brown, Fee, & Thomas, 2009; Chu, 2012), customers (Hortaçsu, Matvos, Syverson, & Venkataraman, 2013; Kale & Shahrur, 2007; Kale, Meneghetti, & Shahrur, 2013; Lian, 2017), business partners (Boone & Ivanov, 2012), and local communities (Alaka, 2006; Bae et al., 2011; Graham et al., 2015; Ponoroff, 1994). These impacts are amply illustrated by the recent high‐profile bankruptcies of Sears, Radio Shack and General Motors (Rizzo & Fitzgerald, 2017; Scurria, 2019; Siegel, 2019).…”

Section: Introductionmentioning

confidence: 99%

CEO turnover and bankrupt firms’ emergence

Lin

Liu

Tan

et al. 2020

Business Fin & Account

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This paper examines whether CEO turnover within a bankrupt firm predicts the firm's likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm's chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor‐in‐possession financing. Additionally, there is a significant increase in managerial quality post‐turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free‐fall bankruptcies, where there is less preexisting agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.

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Contracting with Nonfinancial Stakeholders and Corporate Capital Structure: The Case of Product Warranties

Cited by 29 publications

References 35 publications

CEO Incentives and Customer‐Supplier Relations

CEO Incentives and Customer‐Supplier Relations

Young family firms: Financing decisions and the willingness to dilute control

CEO turnover and bankrupt firms’ emergence

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