Contractual Perspective Research Articles

A contractual perspective on succession in family firms: a stakeholder view

This paper analyses succession in family firms from a contractual perspective. A firm is regarded as a nexus of contractual relations with owners, employees, suppliers of goods and services and customers. These contractual parties are in differing degrees tied to the firm through asset specificities. Succession can affect the value of such assets. In this sense they become stakeholders with vested interests in the succession process. The theoretical discussion of affected stakeholders is backed up by a survey study of 143 Swedish family-owned businesses that have been subject to succession. The results show that the opinions of close shareholders such as family members and incumbent mangers as well as those of other stakeholders such as suppliers and customers are important.

Conservatism and Aggregation: The Effect on Cost of Equity Capital and the Efficiency of Debt Contracts

This paper studies the joint effect of conservatism and aggregation on the cost of equity capital and the efficiency of debt contracts. In the model, a firm's two assets are valued at either the lower-of-cost-or-market or fair value and the accounting report aggregates the value of the two assets. While the process of aggregation leads inevitably to a loss of information, what information is lost depends on the accounting regime. In the conservative regime, gains are ignored while in the fair value regime gains are off-set against losses.The paper studies the joint effect of conservatism and aggregation in two settings. First, it considers an all-equity firm and compares the valuation of equity when investors observe an accounting report under either the conservative or a fair-value regime. The model predicts that cost of equity capital is lower in the conservative regime than in the fair value regime if the firm's production function exhibits sufficiently decreasing marginal returns. Second, the paper takes a contractual perspective and considers the efficiency of debt contracts when debt covenants must be written in terms of the accounting report. The paper shows the maximum capital that can be raised by a debt contract which implements efficient post-contractual decisions is higher in the conservative than in the fair value regime.

The Anti-Globalization Paradox

In The Globalization Paradox, Dani Rodrik sets up what he calls a policy trilemma among hyperglobalization, democracy and autonomy. This trilemma is best understood as a tradeoff between national autonomy and rules that promote globalization. However, a contractual perspective on international law - recognizing that states use international law to make exchanges of policy autonomy in ways that enhance each consenting state’s welfare - suggests that there is no real tradeoff between national autonomy and international legal rules that promote globalization. Instead, these rules may be seen as an expression of national autonomy. Furthermore, international law does not necessarily need the same types of democratic credentials that national law requires, because states consent to international law through their national democratic processes. While there may indeed be an argument that there exists a democracy deficit in the formation of international law, this is a more subtle argument than the one Rodrik makes to the effect that international law can never have democratic credentials unless global democratic government is established. Globalization can take place through international legal rules that have appropriate democratic credentials, and that leave in place appropriate national autonomy.

Choice of Accounting Practices in Brazil: An Analysis from the Contractual Covenants Hypothesis Perspective

This paper aims to investigate whether managers of Brazilian companies registered at the Securities and Exchange Commission (CVM) which have made long-term financial borrowings (bonds and bank loans), voluntarily have changed their accounting practices in order to prevent the violation of their covenants (based on accounting numbers) specified in their lending agreements. During the analysis of this phenomenon, previous studies suggest that company managers have adopted less conservative accounting practices (increasing their earnings and equity) in order to avoid violation of financial covenants. It was possible to demonstrate by the analysis of 125 Brazilian companies (registered at the CVM), with records of long-term borrowings in the credit market via bonds and bank loans (from 2000 to 2006), and using univariate (empirical histograms and chi–square tests) and multivariate (logistic regression) statistical tests, that these companies did not fulfill voluntarily changes in accounting practices in order to avoid violation of financial covenants. Two relevant items can explain the observed results: the low costs in cases of violation of financial covenants, and the active accounting regulations and monitoring efforts of regulatory agencies for public services, especially in the electricity sector. The main contribution of the observed results is to demonstrate that, despite the existence of financial covenants in debt securities issued by the Brazilian companies analyzed, there is no significant evidence of opportunistic changes in accounting practices to avoid breaches in financial covenants.

Performance effects of stakeholder interaction in emerging economies: evidence from Brazil

Firm survival in emerging economies is often related to having access to valuable resources that are in stakeholders' hands. However, the literature on strategy in emerging economies provides scant information on the efficiency of acquiring stakeholder resources and its effect on firm performance. We investigated the stakeholder interaction effects on performance of domestic firms competing in an emerging market (Wright, Filatotchev, Hoskisson, & Peng, 2005) from a contractual perspective (Williamson, 1985). We argue that interacting stakeholders in a contractual set yield synergistic governance structures that allow firms more efficient access to external resources. Using a sample of 267 firms in Brazil (secondary data), we explored different patterns in stakeholder contracting with community, government, top management, and employees. A three-stage analysis process was devised: cluster analysis, general linear model estimation and verification tests. Results suggest that stakeholder interaction has a positive impact on firm performance. The conjoint effect of government and community contracts was found to yield superior firm performance as they provide a basic structure for contracting with other interacting stakeholders.

The Cost of Death - Competition and Consumers in the Funerary Services Market

This book develops an economic and legal analysis on the Spanish funerary services market from the point of view of antitrust and consumers’ protection laws. After describing the main services that can be contracted in this market, and the peculiar process of decision-making and consumption, the main agents of the market are examined, as well as the relationships between them and the legal framework in which they develop their activities, explaining the important liberalization of its regulation in 1997. The study of the agents, their behavior guidelines and the regulatory framework in which they act leads to the analysis on the competition restrictions on the funerary market, detailing the most common illegal practices that can be extracted from the Spanish Competition Tribunal’s resolutions and from the experience in other countries. From a contractual perspective, the weak position and vulnerability of consumers in this market due to information constraints and emotional reasons may justify the adoption of legal rules that protect them from potential abuses by funeral firms.

The legal nature of domain names rights

PurposeThe purpose of this paper is to clarify the legal status of domain names from both a contractual and a property right perspective, and to consider whether domain names are to be considered as a new form of property, in particular as virtual property.Design/methodology/approachThe paper approaches the topic from contractual perspective. It then examines the concept and various property law theories. This is followed by an analysis to the intangibility of domain names and the appropriate category of protection.FindingsDomain names are creatures of contract and contract law will provide some form of protection. According to the bundle of rights theory, domain names are intangible property with limitations. Some names are very valuable but nevertheless attract no protection beyond contractual rights. These names should be clothed with property rights protection. The relevant form of property rights is still contentious issue.Originality/valueThe nature of rights over domain names is a key emerging issue in the area of information technology law, with little to guide lawyers and judges. There is currently no consensus on what the legal status of a domain name is and opinions vary about the nature of these rights. The paper offers an insight to the nature of rights in an attempt to further the protection and recognition of rights over domain names.

Structure of service level agreements (SLA) in IT outsourcing: The construct and its measurement

The increased reliance of companies on IT outsourcing has turned management attention to a set of skills of managing relationships with service providers. While some recent studies have shown that the contracting ability to effectively manage relational exchanges can improve various dimensions of organizational performance, there has been relatively little analysis of how firms strategically use contracts to successfully manage their interfirm relationships. As an extension of past studies emphasizing the importance of the contract and service level agreements (SLA), the study develop an inclusive and conceptually sound framework for structuring SLA in IT outsourcing arrangements drawing upon control theory. Along with a careful description of measurement development as well as rigorous statistical validations, it contributed to instrument development for a set of 11 first-order SLA contractual factors and their relationships with three second-order substantive factors. The results of the study are framed as a tool for benchmarking SLA structuring efforts as well as a foundation for the future study of managing IT outsourcing relationships. The study suggests empirically testing of (1) the complementarity or substitutability between formal contract and relational governance, (2) institution based trust as an initial trust building mechanism, and (3) IT outsourcing success from a contractual perspective as potential areas of future research using the results of the study.

SURVIVAL LOTTERIES RECONSIDERED

In 1975 John Harris envisaged a survival lottery to redistribute organs from one to a greater number in order to reduce number of deaths as a consequence of organ failure. In this paper I reach a conclusion about when running a survival lottery is permissible by looking at the reason prospective participants have for allowing the procedure from a contractual perspective. I identify three versions of the survival lottery. In a National Lottery, everyone within a jurisdiction is a candidate for being a donor for everyone else, disregarding all differences between individuals' eventual possibility of needing an organ. In a Group Specific Lottery, it is a question of running a lottery among members of a specific group who share the same probability of getting organ failure. In a Local Lottery one randomises among individuals who are already in need of a new organ but who happen to be compatible and in need of different organs. While the first is vulnerable to considerations of fairness, it is difficult to perceive a feasible way to implement the second option that does not come with a host of unwelcome consequences. I argue, however, that it is permissible to run Local Lotteries.

La valeur partenariale : vers une mesure opérationnelle...

Résumé L’objectif de cet article est de proposer une mesure opérationnelle de la valeur partenariale. Cette mesure est illustrée par une application à un certain nombre de firmes européennes du secteur automobile. Cette application met en évidence l’intérêt de la démarche pour construire un diagnostic financier permettant de mieux mettre en relation la conception contractuelle de la firme et l’approche stratégique.

A potent secret for winning a crucial edge over your rivals?

PurposeTo explain that a fully‐engaged employee is an extremely important commercial asset.Design/methodology/approachIn the absence of detailed research, the author draws on his extensive experience of working with numerous large organizations on maximizing the extent to which their employees are engaged. His experience is practical and has involved working with employees who themselves toil at the “coal‐face” of organizational success. The research presents an informed anecdotal approach to the subject and is made systematic through a range of practical guidelines.FindingsThe nature of the research means that it discusses general strategic issues in business rather than specific statistical findings. But inherent in the paper is the fact that these general strategic issues are unchanging and are of permanent importance.Practical implicationsThe practical implications of the paper are enormous. The author is saying nothing less momentous than that the difference between an engaged employee (i.e. one who is fully emotionally and intellectually motivated by his or her work) compared with an employee who is not engaged, is prodigious and can make a huge commercial difference to an organization's performance.Originality/valuePerhaps the most important observation of all given by the author is that engaged employees provide a discretionary input, that is, they give a level of energy and commitment to the job which the job does not require from a contractual perspective.

ROGUES, SWINDLERS AND CHEATS: THE DEVELOPMENT OF MISTAKE OF IDENTITY IN ENGLISH CONTRACT LAW

THERE are few more vexed areas of contract law than that of a mistake as to the identity of a contracting party. The case law is difficult to reconcile. Judges and jurists disagree as to the effect of a mistake of identity upon the formation of a contract. This disagreement extends beyond discordance as to the operative principles to the very existence of the doctrine. That the issues are of current concern can be seen in the recent decision in Shogun Finance v. Hudson. This article examines how and why such a situation arose through an examination of the historical development of the doctrine. The thesis of this article is that the meaning of the early cases is obscured when they are viewed solely from a contractual perspective. The participants in these cases were also concerned with issues of criminal law and tort law. As these concerns disappeared from the law the meaning of the early cases was obscured and the cases have ceased to make sense. The article concludes with two sets of observations: first, what can be concluded, as a matter of legal history, from the development of this doctrine; secondly, how the modern law of mistake as to identity should regard these early cases.

An analysis of quality management in franchise systems

PurposeThe purpose of this paper is to provide a conceptual model of behavior in the franchise network from the perspective of quality management.Design/methodology/approachBased on the review of the literature, the development of a theoretical scale for measuring quality in franchise systems in the short term (i.e. transactional quality) and in the long term (i.e. relationship quality) is proposed.FindingsTwo dimensions of transactional quality are identified from the franchisee perspective: contents and assistance. The dimensions of transactional quality from the franchisor's point of view refer to two aspects: formality and identify. The relationship quality identifies variables such as trust between cooperation partners, mutual commitment, and relationalism.Research limitations/implicationsThe proposed model is a theoretical model; an additional step is to validate empirically the dimensions of the model.Practical implicationsThe main practical implication is that the contract does not completely reflect the actual conduct of franchisor‐franchisee relationships. It is necessary to harmonize the transactional or contractual perspective with the relationship view.Originality/valueThe franchise system has assumed great importance as a pattern for the expansion of services and, just like any other organization, needs to preserve the quality of the business concept to achieve overall success. On that basis, this paper aims to contribute to quality management in franchise networks and proposes a dual model for measuring quality: transactional and relational quality.

Standardization and Patent Law - Is Standardization a Concern for Patent Law?

Technical standards that facilitate interoperability are believed to be crucial in the growth and development of the network and computer industry. In a modular and globalized economy, it is believed that the development of compatibility standards benefit from being widely accessible. On the other hand, as intellectual property is based on the idea of exclusion and creates incentives for the right holder to arbitrarily discriminate the access to the protected information, it seems to be inherently incompatible with the efficient development of public, non-discriminatory and well-understood compatibility standards. Literature studying standardization invariably discuss this problem from various angles. However the relationship of standardization and intellectual property from the point of law has only been started to be of concern, as some of the more onerous business practices, such as hold-up or industry standard capture problem began to surface, in a anticipatory standardization. Most of these comments focus on the strategic use and abuse of intellectual property prior to, during and after the setting of the standards, either by an organisation or by a dominant firm, suggesting solutions mainly from contractual, or antitrust or competition law perspective. This paper argues that intellectual property law based solution should accompany these, with the example of patent law, and attempts to identify the aspects of patent law where the solutions to these problems could be based on. This is because often patent law includes specific tools of regulating uses beyond the grants of patents. As the problems are caused by some of expansionary shifts in the doctrines within patent law discipline, it is possible to devise the solution within the discipline of patent law. In sum, standards and standardization should be a concern for patent law.

Resources, capabilities, competences and the theory of the firm

The aim of the paper is to point out some investigation lines which might result useful in building‐up a theory of the firm based on its resources, capabilities and competences (RCC). While the focus on RCC has helped to address some limitations of the standard contractual paradigm, a positive RCC theory of the firm hesitates to take‐off as its operationalization is still at an early stage. In order to move further towards this task, the paper suggests to: distinguish the nature of the problems of the contractual perspective which an alternative theory should solve (Section 2); identify those RCC features which are essential in connecting them to the core issues of the theory of the firm, that is, existence, boundaries and organization (Section 3); evaluate the implications of any hybridisation attempt between the two firm perspectives (Section 4). The paper then moves some exploratory steps along these research directions, providing some arguments about the opportunity to pursue them further.

Explaining and Testing the Economic Organization of Capabilities in the Light of the Contractual Theories of the Firm

Contractual and capabilities perspectives to the firm have often been considered as competing and rival theories in explaining why a firm exists and which its boundaries are.Purpose of this paper is that of trying to identify possible points of contact between these theories and, especially, to explain in-house accumulation of capabilities by using the paradigms of contractual theories.

Disclosure Regimes and Corporate Governance

As there is a strong relationship of disclosure regimes and corporate governance the internationally varying distribution of information rights can be interpreted as a function of different systems of corporate governance. A disclosure system comprises all legally recognized information claims that a system of corporate governance or a financial system furnishes financial contracting parties with: Both public disclosure and disclosure via private information channels may serve value-relevant information for suppliers of finance. An analysis within the framework of the New Institutional Economics brings about two findings: First, looking at the distribution of informational rights from a contractual perspective shows that the nexus of information rights formed by accounting and disclosure regulation and the distribution of power in the firm are mutually determining. For example, the main financing parties in Germany, banks and blockholders, have fairly good access to information via institutionalized internal information channels. Secondly, internationally accepted sets of accounting standards may improve the monitoring by markets. Nevertheless, accounting and disclosure regulation sometimes resemble a cookbook and should be transformed in a more principle-based and deductive system. Furthermore the whole institutional design of corporate governance should be based on realistic assumptions about human decision making to serve the intended purposes.

Performance reporting by oil and gas firms: contractual and value implications

Performance reporting by oil and gas firms is multidimensional, with earnings, cash flows from operations and changes in reserves revealing different facets of underlying firm performance. However, for Canadian oil and gas firms, managerial incentives for earnings management as well as investors’ appreciation of various performance metrics can be affected by the intensity of external monitoring that accompanies a U.S. stock exchange listing. From a contractual perspective, our findings provide some evidence that managers of Canadian oil and gas firms engage in income smoothing, with a U.S. listing as well as large firm size leading to more conservative accruals. From a value perspective, our findings suggest that cash flow is the performance metric most closely associated with stock market valuation and the best predictor of future cash flows. Discoveries are also found to be a reliable and relevant performance metric. However, only investors in U.S. listed firms appear to adjust reported earnings and cash flow figures for the potential overstatement that is caused by the use of the full cost method. Investors in firms that are listed only in Canada do not appear to take the full cost/successful efforts choice fully into account when assigning value multiples to earnings or cash flow.

Power of Arbitrators to Fill Gaps and Revise Contracts to Make Sense

THE SEARCH for the power of international arbitrators to fill gaps and revise contracts is of extreme practical relevance. It also belongs to the most controversial issues of arbitral doctrine of the past three decades.1 Two of the greatest comparative lawyers of the last century, Rene David and Clive Schmitthoff, have inspired this discussion in the late 1970s and early 1980s. David's contribution to the Tenth International Congress of Comparative Law in Budapest in 19782 and Schmitthoff's groundbreaking article on ‘Hardship and Intervener Clauses’ in the 1980 Journal of Business Law 3 have set the stakes for a discussion that is still continuing today. In fact, their views of and approaches to this intricate problem are more up to date than ever.4 The following arguments are intended to shed some light on the current state and the future prospects of the search for the international arbitrators' power to fill gaps and revise contracts. The main reason why this search has lasted so long without generating a satisfactory solution lies in the fact that this discussion is centred around a seemingly clear cut dogma: the procedural character of arbitration is said to be incompatible with the contractual nature of adaptation and gap-filling. This dogma has two aspects. The first is of a contractual, the second of a procedural nature. ### (a) The Contractual Perspective The contractual perspective relates to the natural weakness of complex long-term ‘relational’ contracts. The time factor makes these contracts vulnerable to the change of technological, political or economic circumstances or the omission of certain contractual provisions. Given the significance of long-term contracts, these problems are ‘a fact of life’5 and arbitrators as the natural judges of international trade and commerce should be able to cope with them. However, their resolution requires a balancing of two antagonistic classical principles …

Monetary Policy Design: Institutional Developments from a Contractual Perspective

Twenty years ago, most industrialized economies were just starting the costly process of disinflation. There was little consensus that these disinflations would be successful, or that low inflation once achieved could be maintained. While the USA achieved low inflation without changing its policy making institutions, many other countries did reform their central banking institutions, making them more independent of political influences. In this paper, I address three questions. First, is independence enough? Second, how do the details of an institution's structure translate, through their impact on incentives, into different policy outcomes? And third, can institutions serve as commitment mechanisms?