SSRN-Operating Under a Liquidity Crunch: The Impact of LBOs on Product Availability in the Supermarket Industry by David Matsa
"The structure of financing can impact a firm's operations in important ways. This paper examines how leveraged buyouts affect a supermarket's provision of product availability -- an important dimension of quality in the retail sector. Using U.S. consumer price index microdata to measure the prevalence of out-of-stocks, I find that supermarket leveraged buyouts, which reduce liquidity, lead to increases in out-of-stocks of 10 percent. "
A second "look-in":
"[Matsa] examine[s] the degree to which the impact of LBOs on product availability is affected by various factors associated with either increased liquidity constraints or increased agency costs — a product’s distribution channel, the local competitive environment, the size of the outlet, and the size of the firm undertaking the LBO.... also looks at whether LBO firms had unusually low levels of stockouts before the transactions. All five of these analyses provide indirect evidence pointing towards liquidity constraints as the primary factor driving the average increases in stockouts.
This paper illustrates an important relationship between a firm’s financing and its operations
in the retail sector. The findings are consistent with the empirical literature on capital-market imperfections
and inventory investment...."
This paper is in the spirit of Chevalier (1995) who reported that when firms go through a leverage increasing event (LBO) they are more susceptible to a price war.
As somewhat of an expert on grocery stores (I grew up in my family's
), I can say that it definitely makes sense (although probably not cents) and that liquidity (and other financial side of balance sheet items) can and do negatively impact operations.
That said, it is I am somewhat surprised that Matsa was able to disentangle the many other factors that have an effect on "outs". (For instance, if he were to track outs at our stores I am confident that the would fine that other variables also impact "outs"--for example a trip to Mississippi, a snow storm, a misplaced order, a bad salesperson etc. That is the relationship is a noisy one. That he found a "long-lasting" and "highly significant"relationship is surprising and troubling to one who likes to think the right hand and left hand sides of the balance sheet are at least somewhat
Cite: Matsa, David A., "Operating Under a Liquidity Crunch: The Impact of LBOs on Product Availability in the Supermarket Industry" (November 19, 2006). Available at SSRN: http://ssrn.com/abstract=970790