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Risk Management with Supply Contracts

Heitor Almeida, Kristine Watson Hankins, Ryan Williams

NBER Working Paper No. 23331
Issued in April 2017
NBER Program(s):Corporate Finance

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 affects the use of purchase obligations in the cross-section as well as how firms respond to the introduction of steel futures.

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Document Object Identifier (DOI): 10.3386/w23331

Published: Heitor Almeida & Kristine Watson Hankins & Ryan Williams, 2017. "Risk Management with Supply Contracts," The Review of Financial Studies, vol 30(12), pages 4179-4215.

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