Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts
Using a sample of long-term supply contracts collected from SEC filings, I show that hold-up concerns and information asymmetry are important determinants of contract design. Asymmetric information between buyers and suppliers leads to shorter term contracts. However, when longer duration contracts...
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| Format: | Article |
| Language: | en_US |
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Elsevier
2017
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| Online Access: | http://hdl.handle.net/1721.1/106633 |
| _version_ | 1811078613558099968 |
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| author | Costello, Anna M |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Costello, Anna M |
| author_sort | Costello, Anna M |
| collection | MIT |
| description | Using a sample of long-term supply contracts collected from SEC filings, I show that hold-up concerns and information asymmetry are important determinants of contract design. Asymmetric information between buyers and suppliers leads to shorter term contracts. However, when longer duration contracts facilitate the exchange of relationship specific assets, the parties
substitute short-term contracts with financial covenants in order to reduce moral hazard. Covenant restrictions are more prevalent when direct monitoring is costly and the products exchanged are highly specific. Finally, I find that buyers and suppliers are less likely to rely on financial covenants when financial statement reliability is low. |
| first_indexed | 2024-09-23T11:02:59Z |
| format | Article |
| id | mit-1721.1/106633 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:02:59Z |
| publishDate | 2017 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | mit-1721.1/1066332022-09-27T16:46:41Z Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts Costello, Anna M Sloan School of Management Costello, Anna M Using a sample of long-term supply contracts collected from SEC filings, I show that hold-up concerns and information asymmetry are important determinants of contract design. Asymmetric information between buyers and suppliers leads to shorter term contracts. However, when longer duration contracts facilitate the exchange of relationship specific assets, the parties substitute short-term contracts with financial covenants in order to reduce moral hazard. Covenant restrictions are more prevalent when direct monitoring is costly and the products exchanged are highly specific. Finally, I find that buyers and suppliers are less likely to rely on financial covenants when financial statement reliability is low. University of Chicago Charles T. Horngren Fellowship 2017-01-26T15:22:10Z 2017-01-26T15:22:10Z 2013-03 2013-02 Article http://purl.org/eprint/type/JournalArticle 0165-4101 http://hdl.handle.net/1721.1/106633 Costello, Anna M. “Mitigating Incentive Conflicts in Inter-Firm Relationships: Evidence from Long-Term Supply Contracts.” Journal of Accounting and Economics 56.1 (2013): 19–39. en_US http://dx.doi.org/10.1016/j.jacceco.2013.02.001 Journal of Accounting and Economics Creative Commons Attribution-NonCommercial-NoDerivs License http://creativecommons.org/licenses/by-nc-nd/4.0/ application/pdf Elsevier SSRN |
| spellingShingle | Costello, Anna M Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts |
| title | Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts |
| title_full | Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts |
| title_fullStr | Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts |
| title_full_unstemmed | Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts |
| title_short | Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts |
| title_sort | mitigating incentive conflicts in inter firm relationships evidence from long term supply contracts |
| url | http://hdl.handle.net/1721.1/106633 |
| work_keys_str_mv | AT costelloannam mitigatingincentiveconflictsininterfirmrelationshipsevidencefromlongtermsupplycontracts |