Hidden Non-Financial Risk in Credit-Based Commercial Relationships - An Empirical Study of Legal Dispute Exposure in the Swedish Construction Industry

Abstract

INTRODUCTION The construction industry relies heavily on cross-border collaboration and trade-credit, making the supply-chain particularly vulnerable to counterparty default. Risk is often non-financial in nature, such as contractual disputes, which remain invisible with conventional, backward-looking financial indicators. AIM This thesis examines the interconnected mechanisms creating and supporting the “visibility gap” between disputes and formal disclosure in Swedish construction firms. METHOD The research uses an abductive, qualitative interpretivist approach. Through a combination of a smallscale pilot study of 20 construction firms and 7 semi-structured interviews, the research manages to capture valuable insights from experienced industry experts. The interviews included multiple credit insurance and surety underwriters, as well as an accountant and construction-specialised lawyer. RESULTS The findings revealed a structural reporting lag and a “disclosure paradox”. Firms were found to intentionally supress and delay dispute details believing it will protect access to credit, and future contracts. Vague accounting standards allow managers to exploit discretion and strategically classify significant disputes as remote. This causes institutionalisation in the entire industry, encouraging vague disclosure. External stakeholders cannot close this gap independently due to prohibitive transaction costs of extensive monitoring. Underwriters are therefore forced to “rationally simplify” by relying on traditional financial metrics, leaving the “middle segment” particularly vulnerable. CONCLUSION The visibility gap is a structural problem driven by firm-level agency, industry normalisation, and transaction cost constraints. Within international trade, this opacity shifts operational fragility across borders to unhedged counterparties who lack the infrastructure to deal with it. Risk must therefore develop towards layered, qualitative behavioural monitoring practices.