Counterparty Risk in Material Supply Contracts

Anna Costello and Nina Boyarchenko
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Anna Costello: Massachusetts Institute of Technology

No 235, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper explores the sources of counterparty risk in material supply relationships. Using long-term supply contracts collected from SEC filings, we test whether three sources of counterparty risk -- financial exposure, product quality risk, and redeployability risk -- are priced in the equity returns of linked firms. Our results show that equity holders require compensation for exposure to all three sources of risk. Specifically, offering trade credit to counterparties and investing in relationshipspecific assets increase a firm's exposure to counterparty risk. Further, we show that contracts with protective financial covenants and product warranties mitigate the transmission of risk. Overall, we provide evidence on the channels of supply-chain risk and show that shareholders recognize the role of contractual features in mitigating counterparty risk.

Date: 2015
New Economics Papers: this item is included in nep-ban and nep-rmg
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Related works:
Working Paper: Counterparty Risk in Material Supply Contracts (2015)
Working Paper: Counterparty risk in material supply contracts (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:235

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