American Economic Journal: Microeconomics
no. 1, February 2011
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)
Matsa, David A.
"Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry."
American Economic Journal: Microeconomics,
Intertemporal Firm Choice, Investment, Capacity, and Financing
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Information and Product Quality; Standardization and Compatibility
Retail and Wholesale Trade; e-Commerce