Effects of customer horizontal merger on supplier capital structure decisions

We study the impact of a significant customer's merger on the capital structure of suppliers using a sample of U.S. firms that merged with rivals in the same industry. The bargaining power theory of capital structure predicts that suppliers will increase debt to decrease the surplus available for negotiation when facing customers that gain buying power by increasing their size through mergers. We find that suppliers increase their financial leverage after the effective date of their customer's merger. This increase is economically significant, permanent, and unrelated to supplier merger activity. We also find that greater concentration in the supplier's industry and higher supplier market power are associated with lower increases in supplier's leverage. Overall, the empirical evidence is consistent with suppliers increasing their financial leverage to fortify their bargaining power.