Suppliers' relationship-specific investments and customers' management forecasts

Abstract

In this research, I examine the effect of relationship-specific investments (RSI) made by suppliers on customers' decisions to issue management forecasts. Suppliers' RSI have a low value outside of the customer-supplier relationship. Anticipating that their RSI may provide their customers more bargaining power (i.e., the “hold up” problem), suppliers may be reluctant to make RSI in the first place. To lessen suppliers' hold-up concerns and underinvestment in RSI, customers may issue management forecasts to build reputation and credibility, and establish an image of cooperation and transparency by meeting suppliers' information demands. I find the likelihood of customers' issuing management forecasts is positively associated with suppliers' RSI. I also find that such positive association is less pronounced when suppliers have higher bargaining power, and that customers' management forecasts contribute to longer-term customer-supplier relationships.