Forward contracting and incentives for disclosure

Anil Arya, Brian Mittendorf () and Austin Sudbury
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Anil Arya: Ohio State University
Brian Mittendorf: Ohio State University
Austin Sudbury: Carnegie Mellon University

Review of Accounting Studies, 2015, vol. 20, issue 3, No 3, 1093-1121

Abstract: Abstract As stressed in the literature, disclosure often has different ramifications for firms’ varied constituents. Despite this complexity, a consistent theme in the literature is that a firm’s reliance on a self-interested external supplier for key inputs introduces a disincentive for disclosure. We demonstrate that the presence of forward contracting in such input markets can disable, and even reverse, this well-established theme. When a supplier opts to provide inputs for pre-purchase in a forward market, a buyer can use such pre-purchases to protect against the supplier adjusting input prices upward when disclosure reveals high product demand. This price protection does not imply that the supplier stands to lose under the arrangement—its ability to offer two-tiered pricing (forward and spot prices) provides it with a means of indirect price discrimination. Because of the supplier’s willingness to open a forward market, the firm’s reliance on the supplier for inputs actually promotes disclosure.

Keywords: Competition; Disclosure; Supply chains; Forward markets (search for similar items in EconPapers)
JEL-codes: L11 L13 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-015-9328-9

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