Risk Management with Supply Contracts
Accepted, The Review of Financial Studies
58 Pages Posted: 4 Jun 2016 Last revised: 23 Mar 2017
Date Written: March 21, 2017
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: Suggested Citation