Supplier-Customer Relationships and Corporate Hedging Policy
53 Pages Posted: 27 Feb 2018
Date Written: February 27, 2018
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: Suggested Citation