Working Paper: CEPR ID: DP16701
Authors: Shantanu Banerjee; Sudipto Dasgupta; Rui Shi
Abstract: We show that influential stakeholders distort corporate policies when they cannot commit to a long-term relationship. Following the revelation of financial fraud by a major customer, suppliers surprisingly outperform a control group in terms of sales growth, Tobin’s Q and survival likelihood over a ten-year period. Our results suggest that, prior to the fraud revelation, managers’ short decision horizons and aversion to short-term risk or uncertainty enables influential customers to demand relationship-specific innovation when their bargaining power is stronger, leading to suboptimal diversification. When customer bargaining power weakens, suppliers engage in riskier and novel innovation, which diversifies the customer base.
Keywords: Playing it safe; Corporate fraud; Explorative innovation; Exploitative innovation; Supply chain
JEL Codes: G14; G3; L14; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Revelation of financial fraud by major customers (M48) | Suppliers experience a significant shift in their innovation strategies (O36) |
| Revelation of financial fraud by major customers (M48) | Suppliers engage in less exploitative innovation (O36) |
| Revelation of financial fraud by major customers (M48) | Suppliers engage in more explorative innovation (O36) |
| Suppliers engage in more explorative innovation (O36) | Improved sales growth (L25) |
| Suppliers engage in more explorative innovation (O36) | Higher Tobin's Q (G19) |
| Suppliers engage in more explorative innovation (O36) | Greater long-term survival likelihood (D15) |
| Revelation of financial fraud by major customers (M48) | Suppliers reduce R&D expenditures (O39) |
| Revelation of financial fraud by major customers (M48) | Suppliers generate fewer patents (O39) |
| Suppliers who engage in more explorative innovation (O36) | More likely to survive (I12) |