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

David A. Matsa | Zendy

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

Author(s) -

David A. Matsa

Publication year - 2011

Publication title -

american economic journal microeconomics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 5.339

H-Index - 40

eISSN - 1945-7685

pISSN - 1945-7669

DOI - 10.1257/mic.3.1.137

Subject(s) - business , leverage (statistics) , microdata (statistics) , debt , finance , cash flow , product (mathematics) , incentive , quality (philosophy) , order (exchange) , economics , microeconomics , population , philosophy , demography , geometry , mathematics , epistemology , machine learning , sociology , computer science , census

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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