Management Turnover and Wealth Effect on Suppliers

Abstract

I find that management turnover at customer firms adversely affect suppliers due to contractual incompleteness in long-term product market relationships. Suppliers experience strong negative announcement returns around management deaths, resignations or dismissals at customer firms. Furthermore, the announcement returns of suppliers worsen with proxies that measure bargaining power of new customer management to exploit contractual incompleteness with suppliers. I find that suppliers suffer more negative announcement returns when customer firms have stronger market power, higher leverage and greater R&D intensity, and when suppliers are more highly levered themselves. Lastly, profitability of suppliers decreases after management turnover events of customers.