Friends along supply chain and relationship-specific investments

Abstract

This study investigates whether the presence of school ties between supply chain partners encourages relationship-specific investments. Using Chinese data of educational backgrounds of corporate executives, we document a positive relation between a firm’s school ties with customers and the level of relationship-specific investments. This is consistent with school ties reducing information asymmetry between supply chain partners and mitigating suppliers’ “hold-up” concern when making investment decisions. The result is robust to a PSM approach, a change analysis and a Heckman two-stage analysis. In addition, we show that the association is stronger when customers have an opaque information environment, operate in weak legal environments, face lower switching cost to other suppliers or have higher operational uncertainty. Lastly, we examine the economic consequence of such school-tie associated investments, and find an impact of improved accounting and stock performance. Overall, our findings suggest that school ties benefit cooperation along supply chain by enhancing the level and efficiency of relationship-specific investments.