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American Economic Journal: Microeconomics: Vol. 3 No. 1 (February 2011)

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Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry

Article Citation

Matsa, David A. 2011. "Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry." American Economic Journal: Microeconomics, 3(1): 137-73.

DOI: 10.1257/mic.3.1.137

Abstract

This paper examines whether debt financing can undermine a supermarket firm's incentive to provide product quality. In the supermarket industry, product availability is an important measure of a retailer's quality. Using US consumer price index microdata to track inventory shortfalls, I find that taking on high financial leverage increases shortfalls. Highly leveraged firms appear to be degrading their products' quality in order to preserve current cash flow for debt service. Although reducing quality can erode both current sales and customer loyalty, firms appear to be willing to risk these outcomes in order to achieve benefits associated with debt finance. (JEL D92, G31, G32, L15, L81)

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Authors

Matsa, David A. (Northwestern U)

JEL Classifications

D92: Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L15: Information and Product Quality; Standardization and Compatibility
L81: Retail and Wholesale Trade; e-Commerce

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