The impact of capital structure on the decision to outsource with long term contracts

Teixeira, João

http://hdl.handle.net/10400.3/4960

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Authors

Teixeira, João

Abstract(s)

This paper analyzes how capital structure affects the firms’ strategic choice between outsourcing with long term contracts and outsourcing to the spot market. When outsourcing to the spot market firms are exposed to price uncertainty, whereas a long term contract allows them to set in advance the outsourcing price. We show that, to the extent that leverage and uncertainty can lead to financial distress costs in bad states of nature, firms may use long term contracts as a risk management device to hedge input price uncertainty.

Keywords

Outsourcing Financial Distress Long Term Contracts Uncertainty

URI

http://hdl.handle.net/10400.3/4960

Citation

Teixeira, João C. A. (2011). The impact of capital structure on the decision to outsource with long term contracts, “Working Paper Series” nº 21/11, 31 pp.. Ponta Delgada: Universidade dos Açores, CEEAplA-A.