Risk Management with Supply Contracts

Heitor Almeida, Kristine Hankins and Ryan Williams

No 23331, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 affects the use of purchase obligations in the cross-section as well as how firms respond to the introduction of steel futures.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-cfn, nep-cta and nep-rmg
Note: CF
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Citations: View citations in EconPapers (14)

Published as Heitor Almeida & Kristine Watson Hankins & Ryan Williams, 2017. "Risk Management with Supply Contracts," The Review of Financial Studies, vol 30(12), pages 4179-4215.

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