Supplierrs Relationship-Specific Investment and Customerrs Management Forecasts

Abstract

This paper examines the effect of relationship-specific investment made by the supplier on the customer’s decision to issue management forecasts. Relationship-specific investment made by the supplier has a low value outside the relationship. Anticipating the sunk relationship-specific investment gives the customer more ex post bargaining power, the supplier can be reluctant to make relationship-specific investment ex ante, leading to underinvestment in relationship-specific assets by the supplier as well as economic loss for the customer. To avoid underinvestment by the supplier, the customer firm can use management forecasts to mitigate the supplier’s concerns. This study finds a positive association between the likelihood and frequency of the customer firm issuing management forecasts and relationship-specific investment undertaken by its suppliers. This positive association is less pronounced when suppliers have higher bargaining power. Finally, the issuance of management forecasts by the customer firm contributes to a longer-term customer-supplier relationship.