Does supply chain vertical integration reduce corporate debt financing costs?☆

Abstract

We examine the impact of supply chain vertical integration on corporate debt financing costs using a sample of Chinese firms from 2007 to 2021. By leveraging the Chinese Input-Output Table, we apply Python software to identify a focal firm's supply chain upstream and downstream investment activities. Our findings suggest that when a focal firm invests in or acquires its upstream companies, the debt financing costs are less. Channel analysis demonstrates that supply chain vertical integration can reduce corporate debt financing costs by improving operational efficiency and alleviating information asymmetry. Additional analysis shows that the effect of supply chain vertical integration on corporate debt financing costs is more pronounced for non-state-owned companies, firms operating in competitive industries, firms located in regions with lower levels of marketization, firms in low-concentration supply chains, and firms with low financing constraints. The vertical integration of the whole supply chain can also effectively reduce the cost of corporate debt financing. We expand the boundaries of research on supply chain characteristics and factors influencing debt financing costs, providing empirical evidence for companies to optimize their supply chain allocation and break through debt financing constraints.