Industry Competition, Business Relationship Network And Corporate Debt Financing Decision

With the development of social economy and market competition, firms become more and more connected to each other, especially for the upriver and downriver enterprises. It’s become a big trend that firms reinforce the business relationship and build strategic alliances. It has been proved that, there is a benefit in networks formed by business cooperation between suppliers and customers. First, business networks can reduce trade costs and opportunism by building trust, and then reduce business risks and increase the firms’ value. Second, business networks can increase the exchange of technology and management experience. Relationship has profound ideological basis. Considering the transition economy and the inadequate laws and regulations in China, firms are more willing to build informal relationships. Therefore business network means a lot to firms in China. But at the same time, the concentration of business network let firms infiltrate their partners and influence the business and financial decision.This paper cites firms of SHSE A-share market between 2008 and 2013 as samples, based on the perspective of network, and investigates the relationship between business network and financial decision-making behavior.We use principal component analysis to extract three main factors, corresponding three dimensions of industry competition. In the part of empirical research, we first test the relations between financial decision-making and business network by linear regression. Secondly, we test the relations between financial decision-making and business network under different industry competition degree.Leverage affects a firm’s liquidation decision and may therefore affects the value of relation-specific investments made by the firm’s stakeholders. As a result, firms may want to maintain lower debt ratios. We argue that a firm with suppliers/customers that rely heavily on its purchases and sales is likely to be particularly concerned about the effect its leverage ratio may have on specific investments. Consistent with our expectation, we find that the firms’ leverage ratios are lower if they have main suppliers/customers. In addition, we find out that this effect could be influenced by industry competition.