Corporate Equity Ownership and the Governance of Product Market Relationships*

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 a supplier. Evidence on the size of equity stakes suggests that there may be limits to equity ownership in some contexts. Finally, even after controlling for a number of other factors, we find that relationships accompanied by equity ownership last significantly longer than other relationships, suggesting that ownership aids in bonding trading parties together.