Outside Purchase Contracts, Human Capital and Firm Capital Structure

We examine the impact of outside purchase contracts on firm risk and firm capital structure. We find that firms with more outside purchase contracts have less risky cash flows. Despite these less risky cash flows, firms with these contracts also have less financial leverage especially when they operate in high value-added industries. Examining firm financing decisions, we document that firms with more outside contracts are more likely to issue private securities. Our results are consistent with firms with more outside purchase contracts using less leverage to decrease the expected costs of financial distress on their explicit and implicit contracting parties. ∗Securities and Exchange Commission, and University of Southern California and NBER, respectively. Moon can be reached at [email protected], and Phillips can be reached at [email protected]. We thank Ashwini Agrawal, Tony Cookson, David Matsa, Alexandra Phillips, Michael Roberts, Giorgo Sertsios and seminar participants at George Washington University, Humboldt University, Tsinghua University, University of Colorado, University of Minnesota, University of Oregon, UBC Summer Finance conference and USC for helpful comments. All errors are the authors alone. “The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The view expressed herein are those of the authors and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the commission.” Copyright c ©2014 by Katie Moon and Gordon Phillips. All rights reserved.