Do Responsible Buyers Source from Responsible Suppliers? Buyer-Supplier Ties and Corporate Social Responsibility

Abstract

Abstract: In this paper, we examine the role of corporate social responsibility (CSR) in supply-chain formation and the consequence of buyers’ initiatives in promoting CSR. Using firm-level CSR measures from the KLD dataset and buyer-supplier pairs from the Compustat Segment dataset, we first introduce CSR similarity between buyers and suppliers as a selection criterion for supply-chain formation and examine why socially responsible (irresponsible) buyers often source from responsible (irresponsible) suppliers. Although social status (i.e., CSR) similarity derived from matching theory can partially explain such supply-chain formation, this similarity fails to explain fully why these formations occur. Concerns over sourcing cost moderates the effect of responsible buyers sourcing from responsible (and usually expensive) suppliers, leading to situations in which responsible buyers source from irresponsible suppliers. Moreover, supplier information transparency offered by a firm’s CSR status moderates irresponsible buyers’ sourcing from irresponsible suppliers. Finally, we find supportive evidence that if one party improves its CSR, then the other party will do the same, irrespective of the selection made. Such a relation sheds us understand a key aspect of CSR promotion: CSR pressure placed upon downstream firms could be propagated along the chains, thus forcing firms on these chains to be more responsible.