Outsourcing Risk and Capital Structure: Evidence from the Automotive Industry
We measure outsourcing risk within the global automobile industry’s product dependency supply network to assess its impact on capital structure. Our findings indicate a significant negative effect of heightened outsourcing risk on firm leverage, particularly following the 2016 Kumamoto earthquake in Japan, a climate shock. This reduction in leverage is more pronounced for firms engaged in R&D activities, facing financial constraints, and exhibiting higher profit growth. Moreover, the negative relationship is accentuated when suppliers are from countries characterized by weak legal environments and high political risk. Analyzing firms’ financing decisions, we find that firms exposed to greater outsourcing risks tend to issue equity and face higher spreads from banks and bondholders. These findings underscore the interplay between a firm’s financial and operational decisions. Firms with high outsourcing risk may reduce their leverage to mitigate potential financial distress costs and operating risks, thereby incentivizing suppliers to make specialized products.