Relationship-Specificity, Contract Enforceability, and Income Smoothing

2013 ◽  
Vol 88 (5) ◽  
pp. 1629-1656 ◽  
Author(s):  
Yiwei Dou ◽  
Ole-Kristian Hope ◽  
Wayne B. Thomas
Keyword(s):  
Incomplete Contracts ◽  
Optimal Investment ◽  
Income Smoothing ◽  
Additional Risk ◽  
Specific Investment ◽  
Specific Investments ◽  
Contractual Obligations ◽  
The Cost ◽  
The Relationship

ABSTRACT: Contracting parties, such as the firm and its supplier, have cost-reducing incentives to make investments that support the unique transactions between them. However, to the extent that one party may renege on its contractual obligations, the other party incurring the cost of the relationship-specific investment bears additional risk and is less willing to invest such that sub-optimal investment occurs. In countries where enforceability of explicit contracts is particularly weak, parties have incentives to signal their willingness to fulfill implicit claims and maintain long-term relationships. We predict that firms engage in income smoothing to send such a signal to their suppliers. Consistent with these expectations, we find that firms that both reside in countries with weak contract enforceability and operate in industries with a greater need for relationship-specific investments tend to smooth reported income more. We further decompose income smoothing into “informational” and “garbled” components and find that results are driven by the informational component of income smoothing. Our results support the important role that accruals play in providing information in the presence of incomplete contracts. JEL Classifications: F14, K12, L14, M41, M43

Financial Folly and Spain’s Black Legend

2017 ◽  
Author(s):  
Mauricio Drelichman ◽  
Hans-Joachim Voth
Keyword(s):  
Seventeenth Century ◽  
Economic History ◽  
Military Power ◽  
Great Flexibility ◽  
Loan Contracts ◽  
Historical Tradition ◽  
Black Legend ◽  
Contractual Obligations ◽  
The Relationship

This epilogue argues that Castile was solvent throughout Philip II's reign. A complex web of contractual obligations designed to ensure repayment governed the relationship between the king and his bankers. The same contracts allowed great flexibility for both the Crown and bankers when liquidity was tight. The risk of potential defaults was not a surprise; their likelihood was priced into the loan contracts. As a consequence, virtually every banking family turned a profit over the long term, while the king benefited from their services to run the largest empire that had yet existed. The epilogue then looks at the economic history version of Spain's Black Legend. The economic history version of the Black Legend emerged from a combination of two narratives: a rich historical tradition analyzing the decline of Spain as an economic and military power from the seventeenth century onward, combined with new institutional analysis highlighting the unconstrained power of the monarch.

The influence of unilateral supplier transaction-specific investments on international buyer opportunism: empirical findings from local suppliers in China

2020 ◽  
Vol 37 (2) ◽  
pp. 213-239 ◽  
Author(s):  
Lei Wang ◽  
Chun Zhang ◽  
Jun Li ◽  
Dong Huo ◽  
Xing Fan
Keyword(s):  
Emerging Market ◽  
Multiple Informants ◽  
Supplier Relationships ◽  
Content Type ◽  
Relationship Length ◽  
Cross Border ◽  
Specific Investments ◽  
Using Data ◽  
The Relationship

PurposeThis study examines how unilateral supplier transaction-specific investments (TSIs), directly and indirectly, influence international buyer opportunism and the extent to which detailed contracts enable suppliers to safeguard against international buyer opportunism. The study also examines whether relationship length affects the efficacy of detailed contracts in cross-border outsourcing relationships.Design/methodology/approachThe hypotheses are tested by using data collected from multiple informants working for 229 manufacturing suppliers in China. Multiple regression with a three-way interaction is used to test the hypotheses.FindingsUnilateral supplier TSIs encourage international buyer opportunism through increased supplier dependence. Contract specificity negatively moderates the effect of supplier dependence on international buyer opportunism. This moderating effect is stronger in long-term cross-border buyer–supplier relationships than in short-term ones.Originality/valueThe current study extends the cross-border outsourcing literature by examining how emerging-market suppliers in a weak power position can proactively safeguard against international buyer opportunism by using detailed contracts. Our findings show that supplier dependence mediates the relationship between unilateral supplier TSIs and international buyer opportunism; detailed contracts, however, can help dependent suppliers safeguard against international buyer opportunism. In particular, the findings highlight the importance of long-term buyer–supplier relationships that enhance the efficacy of detailed contracts.

Contract complexity and trust in construction project subcontracting

2020 ◽  
Vol 27 (9) ◽  
pp. 2477-2500 ◽  
Author(s):  
Shui Bo Zhang ◽  
Junying Chen ◽  
Yafan Fu
Keyword(s):  
Regression Model ◽  
Construction Industry ◽  
Performance Outcomes ◽  
Black Box ◽  
Mediating Effect ◽  
Content Type ◽  
Specific Investment ◽  
Specific Investments ◽  
Bilateral Transaction ◽  
The Relationship

PurposeThe purpose of this paper is to unpack the “black box” of the relationship between contract and inter-organizational trust, both theoretically and empirically. Two mediators, namely perceived safeguard and restriction, are identified to build up two seemingly contrary possible paths between contract and trust from current literature. Both paths are tested in the context of Chinese construction industry due to our access to sample.Design/methodology/approachA survey of 295 contractor-subcontractor relationships from Chinese construction industry was conducted. A three-step multiple regression model was employed to test the mediating effect of perceived safeguard and restriction. Then, a hierarchical regression model was used to test the possible moderating effect of bilateral transaction-specific investment.FindingsThe empirical results support the mediating effect of perceived safeguard between contract and trust in the construction subcontracting industry. Bilateral transaction-specific investments enhance the positive effect of contract on safeguard perception.Originality/valueTheoretically, this study contributes to governance literature by opening up the “black box” of the relationship between contract and trust. It provides a better understanding of how and when contract complexity impacts trust, instead of simply focusing on whether contract and trust act as complements or substitutes. Practically, this study provides guidelines for construction firms to decide the degree of contract complexity under various degrees of bilateral transaction-specific investments to enhance the other party’s trust, so as to improve performance outcomes.

scholarly journals Does the Development of Bioenergy Exacerbate the Price Increase of Maize?

2019 ◽  
Vol 11 (18) ◽  
pp. 4845
Author(s):  
Zhengyi Dong
Keyword(s):  
Oil Prices ◽  
Food Prices ◽  
Biomass Energy ◽  
Price Increase ◽  
Oil Price ◽  
Price Ratio ◽  
Cost Channel ◽  
The Cost ◽  
The Relationship

The relationship between oil prices and food prices is complex, and maize is the most prominent example. Whether the development of bioenergy will exacerbate the price increase of maize caused by the increasing price of oil is a topic that is attracting great attention. This paper studies the relationship between oil prices and maize prices. First, the effects of the development of biomass energy on maize price in theory is analyzed by constructing a theoretical model that includes the effects of the cost channel and the demand channel, while setting the maize–oil price ratio as a trigger for the demand channel. Then, this paper empirically analyzes the price data. Both theoretical and empirical analyses show the effects of the demand channel in the long term; that is, the effect of the development of bioenergy on maize prices is weak, and maize prices did not increase sharply. The effect of the cost channel is the main cause of the increases in the price of maize and other foods.

scholarly journals Relationship marketing strategies: when buyer and supplier follow different strategies to achieve performance

2005 ◽  
Vol 9 (spe2) ◽  
pp. 18-35 ◽  
Author(s):  
Danny Pimentel Claro ◽  
Priscila Borin de Oliveira Claro ◽  
Decio Zylbersztajn
Keyword(s):  
Relationship Marketing ◽  
Joint Action ◽  
Theoretical Framework ◽  
Marketing Strategies ◽  
Social Approach ◽  
Specific Investments ◽  
Potted Plant ◽  
Using Data ◽  
The Relationship

Relationship marketing is essential for success in business. The need to understand better the differences in the strategies buyers and suppliers follow is what has motivated this study. We drew on emerging perspectives on inter-firm governance and networks to develop a theoretical framework to understand the success of long-term relationships. We tested the framework using data from 67 merchant distributors (buyers) and 174 suppliers of theirs in the Dutch potted plant and flower industry. While the most successful distributors tend to take the "hard", tangible strategy using transaction specific investments and fostering joint action, the successful suppliers take the "soft", social approach by emphasizing trust and the norm of flexibility in the relationship.

scholarly journals Institutional Investors' Monitoring Roles in State Controlled Firms and Income Smoothing Analysis for Stable Growth and Sustainability: Focusing on China Stock Market

2021 ◽  
Author(s):  
Meng-Jun Xu ◽  
Dong-Il Kim
Keyword(s):  
Sustainable Development ◽  
Private Information ◽  
Institutional Investors ◽  
Corporate Sustainability ◽  
Income Smoothing ◽  
Individual Investors ◽  
Stable Growth ◽  
Using Data ◽  
The Relationship

The purpose of this study is to examine the relationship between the institutional investors which can affect financial performance for corporate sustainability on the income smoothing. Therefore, this study focus on the connection between the nature of stock rights and income smoothing in China. For this study, hypotheses were established on the relationship each state-controlled companies, income smoothing, and information equilibrium of individual investors, and empirical analysis was conducted through related variables. The analysis results are summarized in three categories as follows. First, this research finds that state-controlled firms (CONTs) prefer income smoothing activities compared to non-state-controlled firms for the long-term sustainable development of firms using data from 2011 to 2019. Second, this study found out that Institutional investors support the behavior of CONTs to smooth their earnings because this behavior is seen as an attempt by CONTs to convey valuable private information to other investors. Third, we was able to discover that institutional investors' monitoring effect is predominantly driven by pressure-resistant institutional investors. This research complements the lack of empirical research on income smoothing and enable to give a guideline that the type of stock rights is a critical key determinant of participation in income smoothing activities for stable growth and sustainability in the future.

scholarly journals THE ROLE OF INTERMEDIARIES’ POWER ON CONTRACTING DECISION BETWEEN FARMERS AND INTERMEDIARIES.

New Medit ◽  
2019 ◽  
Vol 18 (3) ◽  
pp. 3-16
Author(s):  
Orjon Xhoxhi ◽  
Remzi Keco ◽  
Engjell Skreli ◽  
Drini Imami ◽  
Bari Musabelliu
Keyword(s):  
Latent Variables ◽  
Bargaining Power ◽  
Contract Farming ◽  
Specific Investment ◽  
Logit Regression ◽  
Specific Investments ◽  
Power Effect ◽  
Logit Regression Model ◽  
The Relationship

The paper investigates the determinants of farmers’ participation in contract farming (CF) in the context of a transition country, namely Albania. The focus is on intermediaries’ bargaining power effect on farmers’ engagement in CF. Exploratory factor analysis is used to develop measures for the latent variables, while a logit regression model is employed to test the hypothesized relationship. The results show that intermediaries’ bargaining power moderates negatively the relationship between farmers’ specific investments and CF participation. Farmers’ with high specific investment are reluctant to contract with buyers who have power because contracting with such a buyer implies that they can extract higher values from farmers’ specific investments. Other strong predictors of contracting decision are farmers’ trust on the intermediary, intermediary’s advice to the farmer and intermediary’s specific investment.

The Effect of National Culture on the Relationship between IFRS Adoption and the Cost of Equity Capital

2018 ◽  
Vol 17 (3) ◽  
pp. 69-85 ◽  
Author(s):  
Alan Diógenes Góis ◽  
Gerlando Augusto Sampaio Franco de Lima ◽  
Nádia Alves de Sousa ◽  
Mara Jane Contrera Malacrida
Keyword(s):  
National Culture ◽  
Power Distance ◽  
Uncertainty Avoidance ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Ifrs Adoption ◽  
The Cost ◽  
The Relationship

ABSTRACT In this study we evaluated the effect of national culture on the relationship between IFRS adoption and the cost of equity capital in 2,692 large firms from 31 countries, covering the period 2002–2007. National culture was proxied by six dimensions: power distance, uncertainty avoidance, individualism, masculinity, long-term orientation, and indulgence. IFRS reduced the cost of equity capital when national culture was not included in the regression, and when power distance was included. Cost of equity capital was low in countries with high levels of uncertainty avoidance and indulgence. Our main finding is that the cost of equity capital tends to be low in countries with IFRS and long-term orientation. The fact that IFRS-related benefits (such as improved information quality and reduced cost of equity capital) may be compromised by components of national culture should be taken into account by investors and analysts in their forecasts and investment decisions.

scholarly journals Managerial Overconfidence and Cost Behavior of R&D Expenditures

2019 ◽  
Vol 11 (18) ◽  
pp. 4878 ◽  
Author(s):  
Kang Sung Hur ◽  
Dong Hyun Kim ◽  
Joon Hei Cheung
Keyword(s):  
Sustainable Growth ◽  
Policy Support ◽  
Future Performance ◽  
Cost Behavior ◽  
The Cost ◽  
Managerial Overconfidence ◽  
Term Performance ◽  
The Impact ◽  
The Relationship

This study examines the impact of a CEO’s confidence level on decisions regarding research and development (R&D) expenditures. R&D is an important part of a company’s strategy for achieving long-term sustainable growth. However, due to its discretionary nature, some CEOs choose to reduce R&D costs to enhance short-term performance. In other words, R&D cost behavior may vary depending on CEO characteristics. This study examines whether, in an effort to improve their firm’s future performance, CEOs who are highly overconfident tend not to actively decrease R&D expenditures even when sales decrease. We posit that CEO overconfidence affects the cost behavior of R&D spending that is not related to their personal privileges. A cost behavior model was utilized to verify the relationship between CEOs’ propensity for overconfidence and R&D expenditures. Our findings show that highly overconfident CEOs tend not to take actions to reduce R&D costs even if sales decrease because CEO overconfidence tends to be positively related to R&D. Since R&D represents both costs and long-term investments, policy support for capitalizing R&D costs can be considered as enhancing the sustainability of businesses.

Building long-term partnerships by certificate implementation: a social exchange theory perspective

2015 ◽  
Vol 30 (7) ◽  
pp. 867-879 ◽  
Author(s):  
Hsin Hsin Chang ◽  
Yao-Chuan Tsai ◽  
Shu-Hui Chen ◽  
Guei-Hua Huang ◽  
Ya Hui Tseng
Keyword(s):  
Relationship Quality ◽  
Social Exchange ◽  
Social Exchange Theory ◽  
Negative Influence ◽  
Exchange Theory ◽  
Content Type ◽  
The Cost ◽  
The Relationship

Purpose – This purpose of this study is to apply social exchange theory (SET) to explain how social exchange behaviors, such as the exchange of knowledge, information and respect between firms, would increase the likelihood of certification implementation and strengthen the relationships among partners. The main purposes of this study are to examine the significant connections between partner interactions and long-term orientation and to examine the links among long-term orientation, certifications and relationship quality. Design/methodology/approach – To test the research hypotheses, structural equation modeling was conducted to analyze the data collected from 136 respondents who are top managers of manufacturing enterprises in Taiwan National Science Park. Findings – Many enterprises in Taiwan regard conflict as a method to express more detailed information about collaboration in business and see conflict as a minus in making the quality of partnership healthier than before. It was affirmed that owning international certifications has an impact on long-term collaborative partnership. Conflicts within a partnership do not completely have a negative influence on relationship quality. Because enterprises want to keep stable partnerships and get long-term competitive advantages, they should continue creating smooth and efficient trading behaviors and should also consider relationship quality as an important factor with regard to their investment in some relationship-specific assets. Research limitations/implications – This study was intended to explore the connection between conflict and relationship quality; however, this relation suggested that conflict may be a negative influence but without any significant proof of the connection. Therefore, future researchers could examine this relation again in the context of Taiwanese enterprises. Practical implications – This study had some implications for enterprises in Taiwan, especially in regard to maintaining a long-term partnership and deciding whether to acquire a specific certification. When firms decide to invest in a relationship-specific asset, they should consider the interaction with the partners and the quality of the partnership. It is suggested that firms should evaluate not only the immediate benefits and drawbacks but also the implications with regard to partner relationships. Meeting the requirements of partners is thus an effective approach to gain trust and commitment. Social implications – As the interactions with partners are executed progressively more smoothly, the relationship quality will become increasingly better. The possibility of having a long-term collaborative relationship becomes higher as the relationship quality improves. Therefore, as the relationship duration becomes increasingly longer, the cost of having an international certification will offer a return on the investment or even result in a profit. Originality/value – A good relationship quality will lead to specific investments from partners, such as the one involving the implementation of specific certifications. The enterprises in Taiwan would prefer to develop a long-term partnership when their demands for a specific investment could be fulfilled. Consequently, enterprises can use the degree of relationship quality to assess the cost and benefits of implementing a certification and can, furthermore help in making the decision.

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