Supplier-Customer Relationships and Corporate Hedging Policy

53 Pages Posted: 27 Feb 2018

See all articles by Jun-Koo Kang

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Limin Xu

University of Adelaide - Business School

Lei Zhang

City University of Hong Kong

Date Written: February 27, 2018

Abstract

We investigate the relation between a firm’s hedging policy and its major customer relationships. We find that the likelihood of a supplier using derivatives to hedge interest rate risk is higher when a major customer has high leverage. This result is increasing in the supplier’s dependence on a major customer, such as when the customer represents a large share of its sales, when the supplier operates in a durable goods industry, or when the supplier makes high relationship-specific investments. We also find that hedging helps the supplier maintain durable relationships with customers, especially highly leveraged customers. Further, we find that announcements of customers’ bond offers and credit rating downgrades have more negative effects on the market value of non-hedging suppliers than that of hedging suppliers. These results suggest that a major customer’s financial health is an important determinant of a supplier’s hedging policy, and that supplier hedging helps increase the perceived viability of the future customer relationship and alleviate potential negative spillover effects along the supply chain.

Keywords: Supplier, Customer, Product market relationship, Hedging, Financial distress risk, Risk management

JEL Classification: L14, G32, G33

Suggested Citation

Kang, Jun-Koo and Xu, Limin and Zhang, Lei, Supplier-Customer Relationships and Corporate Hedging Policy (February 27, 2018). Available at SSRN: https://ssrn.com/abstract=2308493 or http://dx.doi.org/10.2139/ssrn.2308493

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Limin Xu (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Lei Zhang

City University of Hong Kong ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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