Trustworthiness Change and Relationship Continuity after Contract Breach in Financial Supply Chains

Abstract

The management of financial flows in the supply chain is an integral part of effective supply chain management and is an emerging research area. A breach in the relationships between firms and financial providers may not only affect the financial health of the focal firms, but also disrupt the financial stability of their supply chains. Building on life‐cycle theory, this research examines the critical role of trustworthiness in the financial supply chain relationships in the event of a contract breach. Although literature has established that trustworthiness is vital to interfirm supply chain relationships, we further propose that changes in trustworthiness are particularly relevant when interfirm relationships are impacted by negative shocks such as contract breaches. Trustworthiness change (TC), therefore, is likely to serve as a key determinant in the nonbreaching party's decision to continue on in a relationship. Using archival data from multiple data sources, we find evidence thatTCsignificantly influences the likelihood of relationship continuity in the aftermath of contract breaches, and that the effect is not linear. In addition, the effect is stronger for breaches that occur earlier in the duration an interfirm relationship, and when the breaches are less severe. These findings offer several important implications for both financial supply chain relationship theory and practice, which are discussed in the paper.