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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:
jkale@gsu.edu, Robinson College of Business, Georgia State University, 35 Broad St, Atlanta, GA 30303, and Indian Institute of Management–Bangalore, India
Costanza Meneghetti
Affiliation:
comeneghetti@mail.wvu.edu, College of Business and Economics, West Virginia University, 1601 University Ave, Morgantown, WV 26506
Husayn Shahrur
Affiliation:
hshahrur@gmail.com, Department of Finance, Bentley University, 175 Forest St, Waltham, MA 02452
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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 

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