Relationship-Specificity, Bargaining Power Growth, and Firm Performance

We investigate the relevance of relationship-specificity in explaining firm performance and firm value. First, we use an incomplete contracts model to derive hypotheses on how relationship-specificity interacts with bargaining power and growth. And, second, we test these hypotheses on US data for the period 1998 to 2012. We use contract intensity introduced by Nunn (2007) to measure relationship-specificity at the industry level. Relationship-specific investments are considered to be low when a company’s inputs are sold on an exchange and high otherwise. Using size as a measure for bargaining power, we find support for our hypothesis that the benefits of bargaining power increase with relationship-specificity. We also find that growth has a stronger impact on firm value when relationship-specificity is high, indicating that the continuation value of the relationship matters.