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Counterparty Risk in Material Supply Contracts

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  • Nina Boyarchenko

Abstract

Forming long-term partnerships with customers and suppliers often creates a competitive advantage for firms because it permits resource sharing, eases financial constraints, and encourages investment in relationship-specific capital. While these relationships can be beneficial, they also increase firms? exposure to their counterparties? risk. In a recent Staff Report, Anna Costello of MIT and I study two important and unanswered questions about supply relationships. First, what specific characteristics of the trade relationship make a firm more vulnerable to adverse spillovers from their supply chain partners? Second, if managers understand these vulnerabilities, can they design contracts or diversify their partners in order to mitigate exposures to negative events along their supply chain?

Suggested Citation

  • Nina Boyarchenko, 2015. "Counterparty Risk in Material Supply Contracts," Liberty Street Economics 20150209, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:87009
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    File URL: https://libertystreeteconomics.newyorkfed.org/2015/02/counterparty-risk-in-material-supply-contracts.html
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    References listed on IDEAS

    as
    1. Costello, Anna M., 2013. "Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 19-39.
    2. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
    3. Hertzel, Michael G. & Li, Zhi & Officer, Micah S. & Rodgers, Kimberly J., 2008. "Inter-firm linkages and the wealth effects of financial distress along the supply chain," Journal of Financial Economics, Elsevier, vol. 87(2), pages 374-387, February.
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    Cited by:

    1. Rahaman, Mohammad M. & Rau, P. Raghavendra & Zaman, Ashraf Al, 2020. "The effect of supply chain power on bank financing," Journal of Banking & Finance, Elsevier, vol. 114(C).

    More about this item

    Keywords

    counterparty risk premia; Supply contracts; financial covenants;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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