Abstract
We examine the effect of the risk tolerance of downstream firms (i.e., customers) on the investment inefficiency of upstream firms (i.e., suppliers). Using the pilot licensing status of the CEOs as a proxy for their inherent risk tolerance, we find that customer firms led by pilot CEOs are associated with suppliers’ investment inefficiency, where investment inefficiency is more pronounced when the suppliers have less bargaining power over their customers. Our dynamic analysis confirms the causative relation between customer risk tolerance and supplier investment inefficiency and suggests that customers’ risk tolerance plays a significant role in shaping suppliers’ relationship-specific investment strategies.
Highlights
Firms that are economically linked are likely to influence the decisions of one another
The overinvestment tests lack significance in the turnover setting. These results provide at least partial evidence that the changes in the pilot status of chief executive officers (CEOs) in customer firms lead to supplier investment inefficiency
We investigate whether suppliers’ investment inefficiency is induced by risk-tolerant customers
Summary
Firms that are economically linked are likely to influence the decisions of one another. Within the supply chain domain, suppliers’ investments are usually relationship-specific (e.g., Williamson 1983; Joskow 1987; DuHadway et al 2018) and tailored for specific customers; extant research lacks evidence about the spillover effects of CEO personality attributes along the company’s supply chain. To address this knowledge gap, we investigate whether and, if so, how an important innate personality trait, namely the risk tolerance of CEOs of customer firms (hereinafter “customer CEOs”), is associated with supplier firms’ investment inefficiency
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