Mitigating Incentive Conflicts in Inter-Firm Relationships: Evidence from Long-Term Supply Contracts

By Anna M. Costello. 2013

183 citations recorded by the source corpus.

Using a sample of long-term supply contracts collected from SEC filings, I show that hold-up concerns and information asymmetry are important determinants of contract design. Asymmetric information between buyers and suppliers leads to shorter term contracts. However, when longer duration contracts facilitate the exchange of relationship specific assets, the parties substitute short-term contracts with financial covenants in order to reduce moral hazard. Covenant restrictions are more prevalent when direct monitoring is costly and the products exchanged are highly specific. Finally, I find that buyers and suppliers are less likely to rely on financial covenants when financial statement reliability is low.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/419d302042d20ee4c7b4efa11b758c0c633f6df0

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Citations in the corpus

Government Procurement and Changes in Firm Transparency (2020, unknown): “See also Bowen, Ducharme, and Shores (1995), Raman and Shahrur (2008), and Costello (2013).”
Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective (2016, unknown): “…relevant contingency for parties contracting with these companies and these parties would, of course, prefer to have included provisions for the sanctions in their contracts (e.g., to mitigate hold-up concerns and facilitate long-term investments in buyer-supplier relationships, Costello 2013).”
The Role of Corporate Social Responsibility (CSR) Information in Supply-Chain Contracting: Evidence from the Expansion of CSR Rating Coverage (2021, background): “However, given the close and contractual relationship between corporate customers and suppliers (Costello, 2013; Crawford et al., 2020; Bushee et al., 2020), corporate customers might already possess information 2 Heterogenous reporting practices of firms can increase information processing costs,…”
Analyst following along the supply chain (2011, unknown): “The relation between suppliers and customers is explicit and sometimes delineated in contractual arrangements (Katz 1989; Costello 2011).”
Customer-Supplier Relationships and Corporate Tax Avoidance (2017, background): “De Simone (2013) finds that the adoption of IFRS increases transfer pricing flexibility and leads to more tax-motivated profit shifting.”
Customer Concentration Risk and the Cost of Equity Capital (2016, background): “However, studies have found that few firms have supply contracts (Costello, 2013), which is consistent with the conventional view that implicit contracts typically govern customer-supplier relationships because it is very costly to write explicit contracts covering all possible contingencies (Bowen ”
Customer-base concentration, profitability and distress across the corporate life cycle (2013, unknown): “Jap and Ganesan (2000), Fee, Hadlock and Thomas (2006) and Costello (2013) show how covenant restrictions and customer equity stakes can alleviate contracting problems arising in the relationship.”
Is the Risk of Product Market Predation a Cost of Disclosure (2016, background): “The decision to use a manufacturing firm indicator variable to proxy for the propensity to use “ex ante” sales contracts is based on Rajgopal et al. (2003) and Costello (2013), who show that order backlog and longterm supply contracts are particularly common among manufacturing firms.”