We examine whether access to specialized business courts that are more proficient in resolving contractual disputes influences the design of firms’ supply contracts. We use the staggered creation of these courts in different states at different times as our research setting and find evidence that firms with access to these courts tend to negotiate less specific—and, arguably, less complete—contracts with their suppliers and customers. Moreover, their contracts are even less specific when it is more difficult (i.e., costly) to stipulate the parties’ contingent obligations. We also show that when firms have access to specialized business courts, their supply contracts are less specific when the parties have higher quality accounting, suggesting that access to these courts plays much the same role as (i.e., substitutes for) accounting quality in mitigating contractual frictions. And, firms with access to business courts are more likely to rely on contracts rather than vertical integration to mitigate “holdup” risk, suggesting that judicial proficiency influences the boundaries of firms in their jurisdiction. Finally, viewing firms as a “nexus of contracts,” we show that they tend to be more valuable than their counterparts when they have access to these courts.
