Motivated by the rising importance of international sourcing by US firms in recent decades, we study the influence of international sourcing on capital structure. We find that international sourcing has a significant negative influence on financial leverage. The negative influence is stronger in industries that have high R&D intensities and are financially constrained. However, the negative relation is mitigated when suppliers are from countries with strong legal environments and when the supplier markets are more competitive. Overall, our findings suggest that relationship-specific investments, supplier market characteristics, and financial market conditions are key determinants of the sourcing–leverage relation.

This article shows that improving financial efficiency may reduce real efficiency. While the former depends on the total amount of information available, the latter depends on the relative amounts of hard and soft information. Disclosing more hard information (e.g., earnings) increases total information, raising financial efficiency and reducing the cost of capital. However, it induces the manager to prioritize hard information over soft by cutting intangible investment to boost earnings, lowering real efficiency. The optimal level of financial efficiency is non-monotonic in investment opportunities. Even if low financial efficiency is desirable to induce investment, the manager may be unable to commit to it. Optimal government policy may involve upper, not lower, bounds on financial efficiency.

Principal customers have strong incentives to screen and/or monitor suppliers to ensure supply-chain stability; consequently, the implicit certification from the existence of long-term relationships with principal customers has reputational consequences that potentially spill over to other markets. We argue that one such consequence is smaller loan spreads and looser loan covenants on bank loans, as firms that are able to hold on to principal customers longer are perceived as safer firms by banks. We address causality and endogeneity issues via a variety of tests and find consistent results. Our study suggests that non-financial stakeholders can have important effects on the decisions of financial stakeholders.