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Corporate Equity Ownership and the Governance of Product Market Relationships





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    • C. Edward Fee and Charles J. Hadlock are from Michigan State University and Shawn Thomas is from the University of Pittsburgh. We thank Mihir Desai, Zsuzsanna Fluck, Paul Irvine, Jim Linck, Wei-Lin Liu, John Martin, Josh Lerner, Gordon Phillips, David Robinson, Mukunthan Santhanakrishnan, David Scharfstein, an anonymous referee, and seminar participants at George Washington University, the University of Georgia, Harvard Business School, Temple University, the University of Virginia, Washington University in St. Louis, and the 2005 AFA meetings for helpful comments. Hoon-Taek Seo provided superb research assistance. All errors remain our own.


We assemble a sample of over 10,000 customer–supplier relationships and determine whether the customer owns equity in the supplier. We find that factors related to both contractual incompleteness and financial market frictions are important in the decision of a customer firm to take an equity stake in their supplier. Evidence on the variation in the size of observed equity positions suggests that there are limits to the size of optimal ownership stakes in many relationships. Finally, we find that relationships accompanied by equity ownership last significantly longer than other relationships, suggesting that ownership aids in bonding trading parties together.

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