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Risk Management with Supply Contracts

Heitor Almeida1; Kristine Watson Hankins2; Ryan Williams3

1 University of Illinois Urbana-Champaign · 2 University of Kentucky · 3 University of Arizona

Review of Financial Studies 2017 open access

Purchase obligations are forward contracts with suppliers and are used more broadly than traded commodity derivatives. This paper is the first to document that these contracts are a risk management tool and have a material impact on corporate hedging activity. Firms that expand their risk management options following the introduction of steel futures contracts substitute financial hedging for purchase obligations. Contracting frictions, such as bargaining power and settlement risk, as well as potential hold-up issues associated with relationship-specific investment, affect the use of purchase obligations in the cross-section, as well as how firms respond to the introduction of steel futures. Received May 31, 2016; editorial decision March 17, 2017 by Editor David Denis.

DOI
10.1093/rfs/hhx051
Volume
30 (12)
Pages
4179-4215
Language
en
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