Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts
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Costello_Mitigating incentive.pdf
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394.51 KB
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Adobe PDF
Checksum (MD5)
a421a6d57267a94fa60590e7ca5dd438
Author(s)
Costello, Anna M
Date Issued
March 2013
Journal
Journal of Accounting and Economics
Publisher
Elsevier
Citation
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.
Version
Original manuscript
Abstract
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.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/j.jacceco.2013.02.001
