The Dark Side of Stakeholder Influence: The Surprising Effect of Customer Fraud on Suppliers

Shantanu Banerjee, Sudipto Dasgupta and Rui Shi

No 16701, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that influential stakeholders distort corporate policies when they cannot commit to a long-term relationship. Following the revelation of financial fraud by a major customer, suppliers surprisingly outperform a control group in terms of sales growth, Tobin’s Q and survival likelihood over a ten-year period. Our results suggest that, prior to the fraud revelation, managers’ short decision horizons and aversion to short-term risk or uncertainty enables influential customers to demand relationship-specific innovation when their bargaining power is stronger, leading to suboptimal diversification. When customer bargaining power weakens, suppliers engage in riskier and novel innovation, which diversifies the customer base.

Keywords: Playing it safe; Corporate fraud; Explorative innovation; Exploitative innovation; Supply chain (search for similar items in EconPapers)
JEL-codes: G14 G3 L14 L24 (search for similar items in EconPapers)
Date: 2022-02
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