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

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... 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 MoonS@sec.gov, and Phillips can be reached at gordon.phillips@marshall.usc.edu. We thank Ashwini Agrawal, Purchasing and outsourcing from supplier firms has been growing extensively in the 21st century, yet we know little about how such contracting decisions affect a firm's real and financial decisions. Evidence from the electronics, pharmaceuticals and automotive industries shows that the use of contract manufacturing has been growing significantly. In particular, the electronics industry outsourced $75 billion to contract manufacturers in 2000, representing 10 percent of total production (Plambeck and Taylor (2005) ). In addition, firms have been signing extensive contracts with outside firms to run their communication and informational technology operations. We examine the effect of outside firm contracts on firm risk and capital structure using a unique database of purchase contracts (purchase obligation) data that we collect from firm 10-Ks. In a complete contracting world, using outside contracts would not affect firm capital structure. However, with incomplete contracts between the firm and its real side claimants, using outside contracts may affect financial structure through its effect on the firm's suppliers and own employees. The effect on suppliers and employees can arise due to potential costs that financial distress could impose on them. We collect data on outside firm purchase contracts using web crawling and text parsing of firm 10-Ks following the SEC's rule that requires firms to report significant outside purchase contracts to investors in their financial statements. These contracts include both traditional supply contracts and service contracts which outsource tasks like customer call centers, handling communication and information technology for the firm, and the production of products. A prominent example of this later type of contracting is Apple Inc. signing contracts for the production of its iPhones. Our focus is on both domestic and international contracts as our data shows 47.5 percent of contracts are from the U.S., with 25.5 percent of contracting parties from Asia, and the remaining from Europe and other regions. 1 We note that in our data there is still a large fraction of firms in each industry that do not use material outside contracts. They might have suppliers, but do not use explicit contracts as they may purchase on the open market. Thus, the relationship between such firms and their suppliers is likely not to involve investment in firm-specific assets. This fact enables us to effectively examine the characteristics of the firms that use suppliers with material outside contracts and the possible economic link between outside purchase contracts and leverage/financing decisions. 1 See Nunn and Trefler (2012), and Antras (forthcoming) for recent contributions to the international trade literature based on incomplete contracting and the property-rights theory of firm boundaries. Spencer (2005) and Helpman (2006) provide surveys of the earlier outside purchase contracts and international trade literature. Also, see Handfield (1994) , Levy (1995) , Monczka and Trent (2003) for management literature on international outsourcing.