Outsourcing Supply Contracts, Human Capital and Firm Capital Structure

We examine the impact of outsourcing supply contracts on firm risk and firm capital structure. We find that firm outsourcing is associated with less risky firm cash flows. Despite these less risky cash flows, our results show that outsourcing firms use less financial leverage – in particular during the recent financial crisis. We show that the effect of outsourcing on financial leverage is more negative when firms operate in high value-added, high R&D industries. Examining firm financing decisions, we document that outsourcing firms are more likely to issue equity and private securities. Our results are consistent with outsourcing firms using less leverage to decrease the expected costs of financial distress on the firm’s implicit and explicit contracting parties, thus increasing the incentives of employees and suppliers to invest in firm specific assets. ∗Securities and Exchange Commission, and University of Southern California and NBER, respectively. Moon can be reached at [email protected], and Phillips can be reached at [email protected]. We thank Ashwini Agrawal, Tony Cookson, David Matsa, Alexandra Phillips, Michael Roberts, Giorgo Sertsios and seminar participants at George Washington University, Humboldt University, Tsinghua University, University of Colorado, University of Oregon, UBC Summer Finance conference and USC for helpful comments. All errors are the authors alone. “The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The view expressed herein are those of the authors and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the commission.” Copyright c ©2013 by Katie Moon and Gordon Phillips. All rights reserved.