In vertical relationships, when a contract is incomplete, underinvestment problems can arise because a seller's sunk investment costs are ignored in ex post negotiation with a buyer. In this situation, this research examines how the seller's strategic delegation in bargaining using stock options can mitigate the investment hold-up problem in vertical relationships. Under the strategic delegation in bargaining using stock options, the investment cost is not sunk and it is a relevant cost from a manager's perspective because the sunk investment cost is now reversible depending on the manager's exercise decision of stock options. Thus, under the strategic delegation, the reversible sunk costs become relevant costs in the ex post negotiation and the relevant investment costs increase transaction price in the negotiation. The resulting increased transaction price improves the seller's profit, and the improved return on investment induces the first-best level of investment by the seller firm. Unlike previous research, the first-best level of investment can be achieved without relying on any ex ante agreement and renegotiation. The bargaining effect of stock options is robust so that the first-best result can be still obtained when an endogenous exercise price, bilateral investments, cooperative investments, and a simple moral hazard problem are considered.

ABSTRACT Firms’ reluctance at times to publicly disclose financial information is often attributed to concern that the information may be used against them by self‐interested outside parties. These outside parties may interact with the firm in the horizontal realm (e.g., retail competitors) or in the vertical arena (e.g., wholesale suppliers). This article is built on the premise that fully understanding the strategic consequences of disclosure requires joint consideration of horizontal and vertical relationships. When both rivals and suppliers are accounted for, we demonstrate that (i) lower intra‐industry correlation in product demand favors disclosure, with the precise correlation‐cutoff dependent on the firm's use of input suppliers; and (ii) the more a firm relies on input suppliers with pricing power, the less attractive is disclosure.

ABSTRACT The textbook make-or-buy decision is typically described as choosing the cheaper of the two sourcing options. However, research in accounting has consistently demonstrated that strategic and informational considerations often complicate such seemingly straightforward criteria. In a similar vein, this paper shows that when a firm becomes privy to accounting information pertaining to its profitability, its sourcing choice has powerful informational reverberations. This is because input procurement from an outsider serves to convey both profitability information and strategic positioning. Conveying profitability information refers to the fact that the size of the input order provides the supplier a credible signal of the firm's internal accounting information and, thus, its relative ability to compete in the marketplace. Conveying strategic positioning refers to the fact that the upfront placement of the input order also informs the supplier about the firm's chosen strategic choices in the marketplace. We demonstrate that both sources of information conveyance together can point to a firm preferring to buy inputs from a retail rival even when it can make them internally at a lower cost. This penchant for outsourcing to a rival is more pronounced the more accurate the firm's accounting system.