Working Paper: NBER ID: w23331
Authors: Heitor Almeida; Kristine Watson Hankins; Ryan Williams
Abstract: 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.
Keywords: Risk Management; Supply Contracts; Purchase Obligations; Hedging; Steel Futures
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| purchase obligations (POs) (L14) | risk management strategies (H12) |
| introduction of steel futures (G13) | reduction in purchase obligations (POs) (L14) |
| introduction of steel futures (G13) | increase in financial hedging (G19) |
| reduction in purchase obligations (POs) (L14) | stronger reduction for financially healthy firms (G32) |
| introduction of steel futures (G13) | changes in PO usage (L97) |