Running on empty? Financial leverage and product quality in the supermarket industry

David A. Matsa*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)137-173
Number of pages37
JournalAmerican Economic Journal: Microeconomics
Volume3
Issue number1
DOIs
StatePublished - Feb 2011

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

Fingerprint Dive into the research topics of 'Running on empty? Financial leverage and product quality in the supermarket industry'. Together they form a unique fingerprint.

Cite this