Corporate Equity Ownership and the Governance of Product Market Relationships

Fee, C. Edward; Hadlock, Charles J.; Thomas, Shawn

doi:10.2139/ssrn.569161

Corporate Equity Ownership and the Governance of Product Market Relationships

AFA 2005 Philadelphia Meetings

Journal of Finance, Vol. 61, No. 3, 2006

54 Pages Posted: 27 Jul 2004 Last revised: 26 Jun 2015

See all articles by C. Edward Fee

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business

Date Written: May 31, 2005

Abstract

We assemble a sample of over 10,000 customer-supplier relationships and determine whether the customer owns equity in the supplier. We find that factors related to both contractual incompleteness and financial market frictions are important in the decision of a customer firm to take an equity stake in their supplier. Evidence on the variation in the size of observed equity positions suggests that there are limits to the size of optimal ownership stakes in many relationships. Finally, we find that relationships accompanied by equity ownership last significantly longer than other relationships, suggesting that ownership aids in bonding trading parties together.

Keywords: Contracting, ownership, vertical Integration

JEL Classification: G32, L22, D23

Suggested Citation: Suggested Citation

Fee, C. Edward and Hadlock, Charles J. and Thomas, Shawn, Corporate Equity Ownership and the Governance of Product Market Relationships (May 31, 2005). AFA 2005 Philadelphia Meetings, Journal of Finance, Vol. 61, No. 3, 2006, Available at SSRN: https://ssrn.com/abstract=569161 or http://dx.doi.org/10.2139/ssrn.569161