Hostname: page-component-745bb68f8f-b95js Total loading time: 0 Render date: 2025-01-12T12:20:06.676Z Has data issue: false hasContentIssue false
  • English
  • Français

Contracting with Nonfinancial Stakeholders and Corporate Capital Structure: The Case of Product Warranties

Published online by Cambridge University Press:  13 June 2013

Jayant R. Kale ,
Costanza Meneghetti  and
Husayn Shahrur
Jayant R. Kale
Affiliation:
[email protected], Robinson College of Business, Georgia State University, 35 Broad St, Atlanta, GA 30303, and Indian Institute of Management–Bangalore, India
Costanza Meneghetti
Affiliation:
[email protected], College of Business and Economics, West Virginia University, 1601 University Ave, Morgantown, WV 26506
Husayn Shahrur
Affiliation:
[email protected], Department of Finance, Bentley University, 175 Forest St, Waltham, MA 02452
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate the relation between a firm’s product warranty level and its leverage. We find that leverage relates negatively to the warranty level and that this relation is robust to controls for endogeneity and self-selection into offering warranties. The negative warranty-leverage relation obtains only in the subsample of firms in the manufacturing industries. We also show that firms with warranties have the lowest debt levels, firms without warranties but operating in industries where other firms offer warranties on average carry higher debt, and firms in industries where no firm offers a warranty have the highest debt levels.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 699 - 727
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Appelbaum, E. “Bankruptcy, Warranties and the Firm’s Capital Structure.” International Economic Review, 33 (1992), 399–412.CrossRefGoogle Scholar
Arping, S., and Lóránth, G.. “Corporate Leverage and Product Differentiation Strategy.” Journal of Business, 79 (2006), 3175–3207.CrossRefGoogle Scholar
Berger, P. G.; Ofek, E.; and Yermack, D. L.. “Managerial Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 1411–1438.CrossRefGoogle Scholar
Bergstresser, D., and Philippon, T.. “CEO Incentives and Earnings Management.” Journal of Financial Economics, 80 (2006), 511–529.CrossRefGoogle Scholar
Bull, C. “The Existence of Self-Enforcing Implicit Contracts.” Quarterly Journal of Economics, 102 (1987), 147–159.CrossRefGoogle Scholar
Cohen, D.; Darrough, M.; Huang, R.; and Zach, T.. “Warranty Reserve: Contingent Liability, Information Signal, or Earnings Management Tool?” Accounting Review, 86 (2011), 569–604.CrossRefGoogle Scholar
Cohen, D., and Zarowin, P.. “Accrual-Based and Real Earnings Management Activities around Seasoned Equity Offerings.” Journal of Accounting and Economics, 50 (2010), 2–19.CrossRefGoogle Scholar
Cooper, R., and Ross, T. W.. “Product Warranties and Double Moral Hazard.” RAND Journal of Economics, 16 (1985), 103–113.CrossRefGoogle Scholar
Cornell, B., and Shapiro, A. C.. “Corporate Stakeholders and Corporate Finance.” Financial Management, 16 (1987), 5–14.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R.. “Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life-Cycle Theory.” Journal of Financial Economics, 81 (2006), 227–254.CrossRefGoogle Scholar
Gillan, S. L.; Hartzell, J. C.; and Parrino, R.. “Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements.” Journal of Finance, 64 (2009), 1629–1655.CrossRefGoogle Scholar
Grossman, S. J. “The Informational Role of Warranties and Private Disclosure about Product Quality.” Journal of Law and Economics, 24 (1981), 461–483.CrossRefGoogle Scholar
Hart, O. D., and Holmström, B.. “Theory of Contracts.” In Advances in Economic Theory: Fifth World Congress, Bewley, T., ed. Cambridge: Cambridge University Press (1987).Google Scholar
Heal, G. “Guarantees and Risk-Sharing.” Review of Economic Studies, 44 (1977), 549–560.CrossRefGoogle Scholar
Heckman, J. J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153–161.CrossRefGoogle Scholar
Hollis, A. “Extended Warranties, Adverse Selection, and Aftermarkets.” Journal of Risk andInsurance, 66 (1999), 321–343.CrossRefGoogle Scholar
Hortaçsu, A.; Matvos, G.; Syverson, C.; and Venkataraman, S.. “Indirect Costs of Financial Distress in Durable Goods Industries: The Case of Auto Manufacturers.” Review of Financial Studies, 26 (2013), 1248–1290.CrossRefGoogle Scholar
Kale, J. R.; Noe, T. H.; and Ramìrez, G. G.. “The Effect of Business Risk on Corporate Capital Structure: Theory and Evidence.” Journal of Finance, 46 (1991), 1693–1715.CrossRefGoogle Scholar
Kale, J. R., and Shahrur, H.. “Corporate Capital Structure and the Characteristics of Suppliers and Customers.” Journal of Financial Economics, 83 (2007), 321–365.CrossRefGoogle Scholar
Klein, B. “Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships.” Economic Inquiry, 34 (1996), 444–463.CrossRefGoogle Scholar
Kothari, S. P.; Leone, A. J.; and Wasley, C.. “Performance Matched Discretionary Accrual Measures.” Journal of Accounting and Economics, 39 (2005), 163–197.CrossRefGoogle Scholar
Krishnaswami, S., and Subramaniam, V.. “Information Asymmetry, Valuation, and the Corporate Spin-Off Decision.” Journal of Financial Economics, 53 (1999), 73–112.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 1823–1850.CrossRefGoogle Scholar
MacKay, P., and Phillips, G. M.. “How Does Industry Affect Firm Financial Structure?” Review of Financial Studies, 18 (2005), 1433–1466.CrossRefGoogle Scholar
Maksimovic, V., and Titman, S.. “Financial Policy and Reputation for Product Quality.” Review of Financial Studies, 4 (1991), 175–200.CrossRefGoogle Scholar
Opler, T. C., and Titman, S.. “Financial Distress and Corporate Performance.” Journal of Finance, 49 (1994), 1015–1040.CrossRefGoogle Scholar
Perillo, J. M. Calamari and Perillo on Contracts, 5th ed.St. Paul, MN: Thomson West (2003).Google Scholar
Phillips, G., and Sertsios, G.. “How Do Firm Financial Conditions Affect Product Quality and Pricing?” Management Science, 59 (2013), 1764–1782.CrossRefGoogle Scholar
Spence, M. “Consumer Misperceptions, Product Failure and Producer Liability.” Review of Economic Studies, 44 (1977), 561–572.CrossRefGoogle Scholar
Telser, L. G. “A Theory of Self-Enforcing Agreements.” Journal of Business, 53 (1980), 27–44.CrossRefGoogle Scholar
Titman, S. “The Effect of Capital Structure on a Firm’s Liquidation Decision.” Journal of Financial Economics, 13 (1984), 137–151.CrossRefGoogle Scholar
Titman, S., and Wessels, R.. “The Determinants of Capital Structure Choice.” Journal of Finance, 43 (1988), 1–19.CrossRefGoogle Scholar
Zingales, L. “Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry.” Journal of Finance, 53 (1998), 905–938.CrossRefGoogle Scholar