Supplier Instability and Idiosyncratic Risk in China: A Risk Mitigation Perspective from Real Options

Jingbin He and Xinru Ma

Emerging Markets Finance and Trade, 2025, vol. 61, issue 5, 1273-1292

Abstract: Although supply chain instability has garnered significant attention from both academic and practical fields, the propagation of instability-induced risk along the supply chain remains unclear. This study complements the extant literature by exploring the association between the instability of a firm’s upstream suppliers and the firm’s idiosyncratic risk. Analyzing firms listed on the Shenzhen Stock Exchange and Shanghai Stock Exchange in China from 2014 to 2019, we find that firms with greater supplier instability exhibit higher idiosyncratic risk. However, this risk contagion is weaker for firms with more real options (i.e. greater investment opportunities and managerial flexibility) and for firms in regions with higher levels of FinTech digitalization. The impact of supplier instability on idiosyncratic risk remains robust after addressing endogeneity concerns. Our results provide a deeper understanding of the sources of firms’ idiosyncratic risk in the context of supply chain instability and identify tools to mitigate this risk.

Date: 2025
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DOI: 10.1080/1540496X.2024.2407977

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