Discretionary disclosure in the presence of dual distribution channels

A prevailing view in the disclosure literature is that firms who learn favorable market information are reluctant to disclose it, fearing it will attract new rivals. In this paper, we demonstrate that the presence of dual distribution arrangements, wherein consumers can purchase products either from traditional retail firms or directly from suppliers, can notably alter disclosure incentives. As under prevailing views, a retailer disclosing positive news risks entry by competitors. However, entry shifts the incumbent supplier–retailer relationship: the presence of new competitors leads the supplier to treat its retailer more as a strategic partner, translating into lower wholesale prices. This, in turn, can lead the retailer to willingly share favorable news, since such disclosure invites entry precisely when the retailer stands to benefit most from price concessions. Our results suggest that as dual distribution continues to increase in prominence, firms may be more willing to voluntarily disclose sensitive financial information particularly that which points to high demand for its products.     

Market‐share contracts as facilitating practices

This article investigates how the use of contracts that condition discounts on the share a supplier receives of a retailer's total purchases (market‐share contracts) may affect market outcomes. The case of a dominant supplier that distributes its product through retailers that also sell substitute products is considered. It is found that when the supplier's contracts can only depend on how much a retailer purchases of its product (own‐supplier contracts), intra‐ and interbrand competition cannot simultaneously be dampened. However, competition on all goods can simultaneously be dampened when market‐share contracts are feasible. Compared to own‐supplier contracts, the use of market‐share contracts increases the dominant supplier's profit and, if demand is linear, lowers consumer surplus and welfare.     

The effect of supplier industry competition on pay-for-performance incentive intensity

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).     

Preferred suppliers in auction markets

This article examines agreements between a buyer and one of the suppliers which increase their joint surplus. The provisions of such agreements depend on the buyer's ability to design the rules of the final procurement auction. When the buyer does not have this ability, their joint surplus can be increased by an agreement which grants to the preferred supplier a right of first refusal on the lowest price from the other suppliers. When the buyer has this ability, their joint surplus can be maximized by a revelation game for the cost of the preferred supplier and a reserve price based on that cost.     

Do firms' relationships with principal customers/suppliers affect shareholders' income?

In this paper, we examine whether a firm's relationship with its principal customers/suppliers affects its payout policies. A firm has customer–supplier relationships when its business depends on a small number of major customers/suppliers. The extant literature indicates two channels through which customer–supplier relationships might negatively affect a firm's dividend payments: 1) the high financial distress costs associated with relationship-specific investments and 2) the information certification effect of the principle customer. Consistent with expectations, our study reveals a negative relationship between a firm's dependence on customer–supplier relationships and its dividend payments. This result is robust to various model specifications and consistent with evidence regarding the time-series properties of dividends. Moreover, we find that high financial distress costs associated with relationship-specific investments are the key channel through which a firm's customer–supplier relationship affects its dividend payments. Overall, our results suggest that a firm's relationship with its non-financial stakeholders, such as principal customers/suppliers, is an important determinant of its shareholders' income.     

COMPETITION AND REGULATION IN THE U.K. ELECTRICITY INDUSTRY (WITH A BRIEF LOOK AT CALIFORNIA)

In this article, the U.K.'s Director General of Electricity Supply from 1989 to 1998 assesses the effects of deregulation and competition on the U.K. electricity industry after about a decade. Expansion of existing competitors, new entry, and further restructuring have reduced the aggregate share of the largest two generation companies from nearly 80% to 26%. Efficiency has improved and wholesale prices have fallen after an initial increase. Voluntary bilateral contracts markets are about to replace the mandatory "Pool," with centralised control limited to physically balancing the system and settling contract imbalances. Retail supply competition has been active for large industrial customers since the beginning, and 80% of them now buy from another supplier. The market for residential customers opened in early 1999, and already nearly a quarter of them have chosen another supplier. Incentive price controls on transmission and distribution have stimulated increased efficiency and significantly reduced use-of-system charges. Overall, prices for all classes of customers have fallen by 25–35% in real terms since privatisation, and quality of service has improved.
California has adopted a policy that is similar in many respects, but with very different results. The problems there have stemmed partly from less favourable demand and supply conditions, but also from significant policy differences, including barriers to building new capacity, obstacles to the use of long-term supply (or hedging) contracts, retail price controls at untenable levels, and the requirement that (after a transition period) utilities pass through wholesale spot prices directly to their customers. Changes in such policies will eventually enable both producers and consumers in California to benefit from competition.     

Local preferencing for local suppliers: examining the use of locality in public procurement

The academic literature on the selection of suppliers for public contracts, while vast, lacks attention when examining the use of local suppliers. Benefits of local suppliers have been discussed with respect to local economies, but the actual selection of these suppliers has been largely ignored. This paper examines the choice of local suppliers when there is an explicit desire for public procurement agencies to cater to minority-owned and emerging small businesses. The paper provides important insight into local supplier selection, while opening new avenues of future research into the role these suppliers play in the supply chain.     

The relationship between supplier control and competition in public sector outsourcing

The aim of this article is to develop theory and contribute to empirical studies about how the effectiveness of bureaucratic controls in public sector outsourcing is contingent upon supplier competition, and why and how this interaction plays out differently for hard and soft types of outsourced services. In previous inter‐organizational management control (IOMC) research there is a contradiction between theory and empirical results concerning how bureaucratic control and supplier competition interacts in aligning suppliers. While IOMC theory suggests competition reduces the need for bureaucratic control, empirical studies clearly indicate the opposite. We extend previous research and theorizing by differing between the outsourcing of hard and soft types of services and by testing the joint effect of bureaucratic control and competition on supplier alignment. The empirical case for testing theory is outsourcing by competitive tendering in the public sector. We use transaction level data from 166 local government suppliers in Sweden. In accordance with our prediction, the effect of bureaucratic control in aligning suppliers decreases with supplier competition when hard types of services are outsourced. For soft types of services, our results indicate that bureaucratic control is not contingent upon supplier competition. Furthermore, we show that when supplier competition is low the effect of bureaucratic control on supplier alignment is stronger for hard than for soft types of services. These results constitute an important contribution to the central notion of the interplay between bureaucratic control and competition in the IOMC literature.     

Vertical restraints and horizontal control

This article considers vertical restraints in a setting in which duopoly retailers each sell more than one manufactured good. Vertical restraints by a dominant manufacturer enable the firm to acquire horizontal control over a competitively supplied retail good. The equilibrium contracts produce symptoms that are consistent with a variety of observed retail practices, including slotting fees paid to retailers by competitive suppliers, loss leadership, and predatory accommodation with below‐cost manufacturer pricing for the dominant brand(s). Applications are developed for supermarket retailing, where the manufacturer of a national brand seeks to control the retail pricing of a supermarket's private label, and for convenience stores, where a gasoline provider seeks to control the retail pricing of an in‐store composite consumption good.     

The effect of social connections on capital structure in supplier-customer relationships

Suppliers socially connected to major customers with relation-specific investments have higher leverage ratios compared to unconnected suppliers. The presence of connections partially reduces supplier underleverage observed in supplier-customer relationships with relation-specific investments. Consistent with the role of connections in bonding trading parties' commitment, connections to major customers help to increase customer purchases, and supplier leverage increases are primarily observed in firms with high intensity of customer purchases. Additionally, connected suppliers are associated with higher leverage primarily when information asymmetry between parties is high. Overall, connections help strengthening implicit contracts through establishing trust between trading parties.     

Vertical collusion

We characterize collusion involving secret vertical contracts between retailers and their supplier—who are all equally patient (“vertical collusion”). We show such collusion is easier to sustain than collusion among retailers. Furthermore, vertical collusion can solve the supplier's inability to commit to charging the monopoly wholesale price when retailers are differentiated. The supplier pays retailers slotting allowances as a prize for adhering to the collusive scheme and rejects contract deviations. In the presence of competing suppliers, vertical collusion can be sustained using short-term exclusive dealing.     

Trade credit and supplier competition

This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailer’s purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the model’s predictions and are statistically and economically significant.     

Investor valuations of suppliers' major customer disclosures

I investigate whether or not investors in suppliers to retailers find the major customer disclosure value-relevant. Major customer retailers have buyer power because the retailer represents a significant portion of a supplier's sales. Buyer power can indicate reliance on one customer where the supplier is at a disadvantage in negotiating transaction terms. Alternatively, the existence of major customers may suggest the supplier is in a mutually-benefiting partnership with the retailer. I hypothesize that investors find the major customer disclosure value-relevant; however, the direction depends on whether the investor focuses on the partnership aspect or sales concentrated with one customer. My valuation results are consistent with investors focusing on the sales concentration for larger suppliers (higher risk) and the mutually benefiting partnership for smaller suppliers (lower risk). The findings provide insight on valuation implications of having and disclosing a major customer.     

Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.     

Electricity markets and oligopolistic behaviors: The impact of a multimarket structure

The article analyses the development of retail competition in electricity markets, compares market structures and performance in Great Britain and Norway, and concludes that there is no satisfactory outcome in a multimarket setting like Great Britain. We study differences in retail profits between Norway and Great Britain, both considered as benchmarks for competitive markets. We highlight the price parallelism of British suppliers whatever the trend of wholesale prices. These behaviors contrast with the small and stable retail mark-ups in each group of suppliers in Norway. The main explanation comes from the combination of vertical integration and multimarket setting, which allows parallel pricing behaviors in the British retail market. We also evaluate the impact of other factors that influence the dynamic of retail competition: national fuel mixes and institutional design of retail and wholesale markets. However, we demonstrate that a multimarket setting, which is a major feature of most retail markets, remains the main determinant of oligopolistic profit. Remedies must be implemented to correct these market imperfections.     

Product market competition and the disclosure of supply chain information

We investigate how product market competition affects corporate voluntary disclosure decisions, specifically regarding supply-chain information. Our results, based on a sample of manufacturing companies listed in China from 2010 to 2016, show that companies in more competitive industries disclose less customer/supplier information. The main results stand through several robustness tests. Further analyses show that the negative relationship between product market competitiveness and supply-chain information disclosure is stronger when the disclosure contains more incremental information and when competitors are more capable of gaining competitive advantage using the disclosed information. Our study contributes to the understanding of both the relationship between product market competition and voluntary disclosure decisions and the regulation of information disclosure to build a transparent capital market.     

Different open book accounting practices for different purchasing strategies

Extant studies of open book accounting focus primarily on data disclosure in long-term, committed purchasing arrangements. We extend research beyond that context by exploring the association between open book practices (in terms of nature and uses of disclosed data as well as conditions of data disclosure) and two different purchasing strategies. Three case studies are performed. Results indicate that within market procurement characterized by a transactional purchasing strategy, cost data primarily serve to reduce purchase price. Therefore, data disclosure is limited in scope and scale, occurs primarily during supplier evaluation and selection, and is characterized by an adversarial atmosphere. Incentives for suppliers to open their books focus on short-term tangible gains. Within a hybrid exchange arrangement characterized by a relational purchasing strategy, data disclosure supports cost reduction, e.g., through joint product development, and is more comprehensive. The atmosphere is less adversarial and suppliers reap long-term benefits.     

The Role of Auditing in Buyer-Supplier Relations

Supply chain management has emerged as one of the more important topics in managerial accounting. The importance of information exchange between parties involved in supply chains has also been well documented. By addressing the value of audits in this setting, this theoretical paper serves to link two strains of accounting research: the managerial topic of supply chain effectiveness and the value of the audit function, in particular audits of the suppliers conducted by the buyers. We analyze the role of supplier audits with long-term, profit sharing contracts between the buyers and suppliers. Through a stylized model, we demonstrate that when random supplier audits are conducted, the buyer can effectively leave zero informational rents to the supplier, regardless of the supplier's cost type.     

Public Disclosure of Forward Contracts and Revelation of Proprietary Information

Financial executives of firms engaged in forward contracting have raised concerns that mandated disclosure of those contracts would reveal proprietary information to rival firms. This paper considers the basis for those concerns in the framework of a duopoly in which one privately informed producer enters the forward market prior to production. In choosing its forward position, the firm considers the effects of that position on the forward price and second stage product market competition with its rival. Two regimes are considered: mandated disclosure and no disclosure. Under the former, the contracting firm faces a tension between exploiting its information advantage in the forward market and attempting to influence the production decision of its rival. On average, in equilibrium, the contracting firm gains a first-mover advantage, but at the cost of revealing its private information to its rival and extracting less expected gains from uninformed forward market participants. In contrast, with no disclosure, the contracting firm cannot influence rival firm beliefs, but extracts more expected gains from its private information in both the forward and product markets. On balance, the contracting firm prefers no disclosure. Moreover, parameterizations exist such that the rival also prefers that regime. These findings explain the opposition of respondents to draft proposals of Statement of Financial Standards No. 133.     

Interest Rates in Trade Credit Markets

All things equal, interest rates should increase with the borrower's risk. And yet, Klapper, Laeven, and Rajan (2012) cannot find such a positive relation in a broad sample of trade credit contracts. We shed some light on this puzzle by arguing that competition between informed and uninformed suppliers weakens the link between the trade credit cost and the borrower's creditworthiness. Our model implies that trade credit rates are more likely to increase with the borrower's risk if suppliers are less profitable, have high cost of funds, or sell inputs to firms plagued by moral hazard and financial distress.