CEO incentives and customer-supplier relations

Document Type

Article

Publication Title

Production and Operations Management

Abstract

This study explores how suppliers adjust their relation-specific investments (RSI) in response to the different risk-tak-ing incentives provided by the customer firm to its CEO, during normal and transition periods. We investigate thisrelation using 17,553 customer–supplier transactions over the 1993–2013 period. We find strong evidence consistent withthe risk-taking argument. Specifically, we find that an increase in the risk-taking incentives of customer CEOs leads to adecline in suppliers’ RSI in normal periods, but an increase in RSI during transition periods. We employ the FAS-123Rmandate to show that an exogenous reduction in customer CEO’s incentive pay increases suppliers’ RSI. We reaffirm theeffect with the passage of the Sarbanes–Oxley Act as a secondary quasi-natural experiment. Finally, we examine severalscenarios that either amplify or attenuate the observed relation, based on factors such as financial constraints, distress,growth opportunities, industry competition, and other firm characteristics. Our study contributes to the literature thatexamines the interplay between corporate policy and product market relationships.

Publication Date

1-9-2017

Publisher

Wiley-Blackwell

Volume

Vol.26

Issue

Iss.9

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