What is relationship specific investment? As noted earlier, a relationship specific investment is an investment which once made (sunk) by one or both parties to an ongoing trading relationship has a lower value in alternative uses than it has in the intended use supporting this specific bilateral trading relationship .
Are relationship-specific investments by suppliers/customers associated with discretionary accruals?
We find that industry-level proxies for relationship-specific investments by suppliers/customers are positively associated with the magnitude of discretionary accruals, volatility of earnings, and the frequency of large earnings increases.
What is asset specificity?
In economics, asset specificity is the degree to which a thing of value, or even a person of value, can be readily adapted for other purposes. A thing with high specificity is useful only for certain tasks or in certain circumstances. An asset with low specificity is a more flexible resource, and therefore a more valuable one.
What is the relationship between resource specificity and resale value?
An asset with low specificity is a more flexible resource, and therefore a more valuable one. A resource that can be readily adapted for many purposes is said to have low specificity. A resource that is customized for specialized uses has high specificity. The resource that has low specificity generally has a higher resale value.
What are relationship specific assets?
Assets are relationship-specific if their value is greater within a relationship than outside it. A typical example involves an upstream supplier who makes investments to customize her product for the needs of the downstream purchaser.
What is specific investment?
Specific investments, which are tailored to a particular company or value-chain partner, are important components of firms' marketing strategies. At the same time, extant theory suggests that such investments pose considerable risk, because they put the receiver in a position to opportunistically exploit the investor.
What is hold up in strategy?
The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thus reduce their own profits.
How can hold up problems be mitigated?
A final way in which hold-up problems can be mitigated is if one player reduces their relative added value by making it costly to break existing arrangements. This can be achieved if that player cuts off their own outside options; that is, they burn their bridges.
What is meant by specificity in economics?
In economics, asset specificity is the degree to which a thing of value, or even a person of value, can be readily adapted for other purposes. A thing with high specificity is useful only for certain tasks or in certain circumstances.
What are the types of asset specificity?
526) himself, who distinguished four types of asset specificity: (i) human asset specificity; (ii) physical asset specificity; (iii) site specificity; and (iv) dedicated asset specificity, to which both brand name capital specificity (Williamson 1985) and temporal specificity (Malone et al.
What is a post investment holdup?
Post Investment Hold Up. Post investment hold up is a situation whereby a problem arises due to the. phenomenon of incomplete contracts for example in the case. flight from India to Birmingham, the airline took advantage. the deal.
What is residual control?
Residual control rights are the rights to make any decisions regarding an asset's use that are not explicitly assigned to another party in a contract.
What is a specific asset?
Specific assets are assets that have a significantly higher value within a particular transacting. relationship than outside the relationship.
How can breach of contract be avoided?
Four Strategies to Prevent a Breach of ContractClarity of Wording and Language. ... Realistic Ability to Follow in Accordance to the Contract. ... The Contract Does Not Break Any Laws. ... Research the Other Party's Personal and Professional Reputation.
What is contractual risk?
“Contract risk involves potential losses due to a buyer's inability to pay or the terms of the agreement being broken.” Financial Risk.
What is causing the holdup?
A holdup is a delay or something that causes a delay. It's frequently used in the phrase What's the holdup? —meaning “What's the cause of the delay?” Holdup can also refer to a kind of robbery, typically in which the robber takes a person's money by stopping them and threatening them with a weapon, especially a gun.
What is an example of specific risk?
Specific risk is the risk of an event occuring that would directly or indirectly affect the market value of an asset or particular group of assets. For example, a rumor of a shortage of raw silicon is a specific risk to which computer and high-tech stocks would be exposed.
What is meant by specific risk?
To an investor, specific risk is a hazard that applies only to a particular company, industry, or sector. It is the opposite of overall market risk or systematic risk. Specific risk is also referred to as unsystematic risk or diversifiable risk.
What are private investment examples?
Private investments include, without limitation, investments in hedge funds, oil and gas ventures, real estate syndicates, limited partnerships, private investment partnerships, private placements, private equity funds or similar vehicles.
What is the difference between systematic risk and specific risk?
All investment assets can be separated by two categories: systematic risk and unsystematic risk. Market risk, or systematic risk, affects a large number of asset classes, whereas specific risk, or unsystematic risk, only affects an industry or particular company.
What is an appropriate proxy for RSI?
What is an appropriate proxy for RSI? It is well known in the literature that RSI is generally hard to measure empirically even though it is prevalent as a theoretical construct. We follow the existing literature cited earlier and use R&D expenses, patent citations, and advertising expenses to proxy for RSI. Note that while R&D may not precisely measure the extent of RSI, the underlying premise is that firms that invest more in R&D are more likely to be making RSI-type investments. For example, Armour and Teece (1980) posit that greater the R&D expenditure in a vertical chain, the greater is the likelihood of sophisticated inter-stage dependencies. Further, Allen and Phillips (2000) argue that greater RSI is more likely in high-R&D industries. Finally, Levy (1985) suggests that high-R&D firms use specialized inputs that require RSI by supplier-firms. An advantage of using R&D expenditure as a proxy is that this information is widely available for publicly traded US firms.
What are independent variables of interest?
The independent variables of interest are the RSI made by a firm and its market power. We define these two variables in several different ways. In the base case, where we analyze AR (i.e., the TC extended by the firm), we measure RSI by that firm’s R&D expenses as a fraction of its lagged assets ( Kale and Shahrur, 2007 ); and Firm’s Market Power ( FMP) by the price-to-cost margin or the Lerner Index, which is its ratio of operating profits to sales ( Gaspar and Massa, 2006; Aghion, Reenen, and Zingales, 2009; Kale and Loon, 2011 ). When the dependent variable is the annual change in TC provided (i.e., ΔAR ), then the corresponding independent variables are also defined as changes: change in RSI ( ΔRSI) is the logarithm of one plus the ratio of RSI to its own lagged value, and change in FMP ( ΔFMP) is the logarithm of one plus the ratio of FMP to its own lagged value. We examine alternative measures of RSI, such as patent citations, advertising, and whether the industry’s output is differentiated; we describe these variables when they enter the analysis. We also use alternative measures of FMP, such as the census-based industry Herfindahl and the firm’s market share (also defined later).
George Norman and Darlene C. Chisholm
This unique and original Dictionary presents a fully inclusive compilation of foundational concepts, models, methodologies, and applications in the field of industrial organization. It encompasses myriad facets of the topics, from its early days of conception through to modern theoretical and empirical methodologies.
Reference Entry
This unique and original Dictionary presents a fully inclusive compilation of foundational concepts, models, methodologies, and applications in the field of industrial organization. It encompasses myriad facets of the topics, from its early days of conception through to modern theoretical and empirical methodologies.
What is asset specificity?
In economics, asset specificity is the degree to which a thing of value, or even a person of value, can be readily adapted for other purposes. A thing with high specificity is useful only for certain tasks or in certain circumstances. An asset with low specificity is a more flexible resource, and therefore a more valuable one.
Why is an asset considered highly specific?
An asset might be considered highly specific because it is impossible or prohibitively expensive to move to a different location. There also is physical specificity, which indicates equipment, machinery, or software that has been customized for a specific customer or a unique use.
What are some examples of highly specific assets?
Customized computer software is an example of a highly specific asset. The oil and gas industry, the airline industry, and the manufacturing sector all have high asset specificity. Oil drills, jetliners, and assembly lines are not easily or cheaply adapted to other purposes.
