Risk Management with Supply Contracts

Accepted, The Review of Financial Studies

58 Pages Posted: 4 Jun 2016 Last revised: 23 Mar 2017

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Kristine Watson Hankins

University of Kentucky

Ryan Williams

University of Arizona - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2017

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.

Keywords: Risk management, supply contracts, liquidity management

JEL Classification: G32, L13

Suggested Citation

Almeida, Heitor and Hankins, Kristine Watson and Williams, Ryan, Risk Management with Supply Contracts (March 21, 2017). Accepted, The Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2788131 or http://dx.doi.org/10.2139/ssrn.2788131

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kristine Watson Hankins (Contact Author)

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States

Ryan Williams

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
202
rank
132,126
Abstract Views
923
PlumX