Thursday, April 21, 2011
Posted by D. Daniel Sokol
Ulrike Malmendier, University of California, Berkeley - Department of Economics, Enrico Moretti, University of California, Berkeley - Department of Economics, and Florian S. Peters, University of Amsterdam have an interesting new paper on Winning by Losing – Evidence on Overbidding in Mergers.
ABSTRACT: I examine the determinants, length, and effects of supplier-customer contracts using unique data on a customer’s contractual purchase obligations with its suppliers. Consistent with theory, I find evidence that supplier relationship-specific investments, the supplier’s relative bargaining power, production complexity, and vertical integration costs are positively related to the propensity for suppliers and customers to contract. I also find evidence that the propensity for suppliers and customers to contract is negatively related to alternative sources of information about the customer, contracting costs, and the percentage of a customer’s input traded on financial markets. Contract length is positively related to relationship-specific investments and supplier bargaining power. Additionally, customer firms which have product market contracts with their suppliers have better relative performance as measured by operating performance and firm value. These performance results are robust to corrections for endogeneity. Finally, I examine the choice between vertical integration versus supplier-customer contracts, and find that the choice is predicted by the type of relationship-specific investments. Consistent with theory, I find that relationship-specific investments defined using tangible assets are positively related to vertical integration and relationship-specific investments defined using R&D intensity are positively related to contracts. My results suggest that market frictions play an important role in shaping supplier-customer contracting activity and firm boundaries.