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Risk Management with Supply Contracts

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  • Heitor Almeida
  • Kristine Watson Hankins
  • Ryan Williams

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, affect the use of purchase obligations in the cross-section, as well as how firms respond to the introduction of steel futures. Received May 31, 2016; editorial decision March 17, 2017 by Editor David Denis.

Suggested Citation

  • Heitor Almeida & Kristine Watson Hankins & Ryan Williams, 2017. "Risk Management with Supply Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4179-4215.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:12:p:4179-4215.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx051
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    Citations

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    Cited by:

    1. Merkert, Rico & Swidan, Hassan, 2019. "Flying with(out) a safety net: Financial hedging in the airline industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 127(C), pages 206-219.
    2. Laura Ryser & Sean Markey & Greg Halseth, 2020. "Scaling up and scaling down supply chains in volatile resource-based economies," Local Economy, London South Bank University, vol. 35(8), pages 831-851, December.
    3. Biguri, Kizkitza & Brownlees, Christian & Ippolito, Filippo, 2022. "Corporate hedging and the variance of stock returns," Journal of Corporate Finance, Elsevier, vol. 72(C).
    4. Dasgupta, Sudipto & Chen, Chen & Huynh, Thanh & Xia, Ying, 2020. "Product Market Competition and the Relocation of Economic Activity: Evidence from the Supply Chain," CEPR Discussion Papers 15056, C.E.P.R. Discussion Papers.
    5. Gopalakrishnan, Balagopal & Mohapatra, Sanket, 2020. "Insolvency regimes and firms' default risk under economic uncertainty and shocks," Economic Modelling, Elsevier, vol. 91(C), pages 180-197.
    6. Ferriani, Fabrizio & Veronese, Giovanni, 2022. "Hedging and investment trade-offs in the U.S. oil industry," Energy Economics, Elsevier, vol. 106(C).
    7. Pratibha Wasan & Ashwani Kumar & Sunil Luthra, 2023. "How can banks and finance companies incorporate value chain factors in their risk management strategy? The case of agro‐food firms," Business Strategy and the Environment, Wiley Blackwell, vol. 32(1), pages 858-877, January.
    8. Dai, Jing & Hu, Nan & Huang, Rong & Yan, Yan, 2023. "How does credit risk affect cost management strategies? Evidence on the initiation of credit default swap and sticky cost behavior," Journal of Corporate Finance, Elsevier, vol. 80(C).
    9. Latha Shanker & Ahmet Satir, 2021. "Managing foreign exchange risk with buyer–supplier contracts," Annals of Operations Research, Springer, vol. 299(1), pages 1001-1024, April.
    10. Kim, Kirak, 2020. "Inventory, fixed capital, and the cross-section of corporate investment," Journal of Corporate Finance, Elsevier, vol. 60(C).
    11. Richard Friberg & Thomas Seiler, 2021. "Different ways of managing risk as reported in 10‐Ks: A supervised learning approach," The Financial Review, Eastern Finance Association, vol. 56(4), pages 773-792, November.
    12. Gunratan Lonare & Ahmet Nart & Ahmet M. Tuncez, 2022. "Industry tournament incentives and corporate hedging policies," Financial Management, Financial Management Association International, vol. 51(2), pages 399-453, June.

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