Socially Responsible Customers and Intangible Investment

Abstract

Intangible capital has become an increasingly important factor for production in the knowledge economy. We use a large sample of U.S. firms and their major customers to test whether the presence of socially responsible customers can have an influence on suppliers’ intangible capital investment decisions. Our findings suggest that the social performance of major customers has a positive impact on the suppliers’ intangible investment, but the effect on their physical investment is marginal. When suppliers gain a new major customer with better social performance than their existing customers, they invest in more intangible assets. The results are robust when controlling for industry and year fixed effects, customer-base concentration, and the firm characteristics of both suppliers and customers, including Tobin’s q, total assets, financial leverage, sales growth rate, and profitability. Our findings are consistent with the implicit contract theory, which suggests that customers’ social performance affects how trustworthy their implicit commitments are perceived to be by their suppliers and thus has an impact on the suppliers’ intangible investment.