Contract Contingencies and Uncertainty: Evidence from Product Market Contracts

Posted: 9 Feb 2023 Last revised: 6 Feb 2024

See all articles by Kai Wai Hui

Kai Wai Hui

University of Hong Kong

Jun Oh

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Guoman She

The University of Hong Kong - Faculty of Business and Economics

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: February 2, 2024

Abstract

We study contingencies written in firms’ material product market contracts, focusing on the theoretical prediction of uncertainty being an important determinant. We identify contract contingencies from firms’ public regulatory filings and examine the effects of general business uncertainty and specific innovation-related uncertainty. For causality, we utilize two major business shocks (the 2008 financial crisis and the COVID pandemic) and the diffusion of 29 disruptive innovation shocks (Bloom et al. 2021). We also explore the effects of re-negotiation costs and writing costs. Overall, our empirical results are consistent with the predictions from the dynamic models of incomplete contracting.

Keywords: Incomplete Contracting; Contingencies; Uncertainty; Writing Costs; Re-negotiation Costs; Innovation

JEL Classification: M41, M48, H83

Suggested Citation

Hui, Kai Wai and Oh, Jun and She, Guoman and Yeung, P. Eric, Contract Contingencies and Uncertainty: Evidence from Product Market Contracts (February 2, 2024). Available at SSRN: https://ssrn.com/abstract=4353111

Kai Wai Hui

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Jun Oh

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Guoman She

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

P. Eric Yeung (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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