Operational Disruptions, Firm Risk, and Control Systems

William Schmidt () and Ananth Raman ()
Additional contact information
William Schmidt: Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
Ananth Raman: Harvard Business School, Technology & Operations Management Unit, Boston, Massachusetts 02163

Manufacturing & Service Operations Management, 2022, vol. 24, issue 1, 411-429

Abstract: Problem definition : Operational disruptions can impact a firm’s risk, which manifests in a host of operational issues, including a higher holding cost for inventory, a higher financing cost for capacity expansion, and a higher perception of the firm’s risk among its supply chain partners. Academic/practical relevance : Although disruptions have been studied extensively in the operations management literature, the emphasis has been on mitigating the deleterious impact on the firm’s production potential rather than its risk. We examine whether implementing and credibly attesting to having effective internal control systems will meaningfully influence the impact of operational disruptions on the firm’s risk and market valuation. Methodology : We exploit a 2004 regulatory change that required certain firms to attest to having control systems in place. Our triple-difference regression specification takes advantage of a regulatory anomaly that excluded a well-defined set of firms from complying with the control system requirement. Results : We find that firms that were obligated to comply with this regulatory requirement experienced a materially smaller increase in their risk and a smaller decrease in their market value in the aftermath of an operational disruption. Firms that were not obligated to comply with this requirement did not experience such benefits in the aftermath of a disruption and instead, experienced a larger increase in their risk. Managerial implications : Fostering a better understanding of whether credible control systems can reduce the impact of disruptions on the firm’s risk and value is important as it identifies a broader set of mitigation strategies available to operations managers. This can help managers achieve a better fit between their risk mitigation initiatives and their objectives and budget constraints.

Keywords: operational risk; operational disruptions; information asymmetry; control systems (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2020.0943 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:24:y:2022:i:1:p:411-429

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().