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CEO Incentives and Customer‐Supplier Relations
Author(s) -
Gu Tiantian,
Sanders Nada R.,
Venkateswaran Anand
Publication year - 2017
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12715
Subject(s) - incentive , business , competition (biology) , argument (complex analysis) , industrial organization , financial distress , mandate , marketing , microeconomics , economics , financial system , ecology , biochemistry , chemistry , political science , law , biology
This study explores how suppliers adjust their relation‐specific investments ( RSI ) in response to the different risk‐taking incentives provided by the customer firm to its CEO , during normal and transition periods. We investigate this relation using 17,553 customer–supplier transactions over the 1993–2013 period. We find strong evidence consistent with the risk‐taking argument. Specifically, we find that an increase in the risk‐taking incentives of customer CEO s leads to a decline in suppliers’ RSI in normal periods, but an increase in RSI during transition periods. We employ the FAS ‐123R mandate to show that an exogenous reduction in customer CEO 's incentive pay increases suppliers’ RSI . We reaffirm the effect with the passage of the Sarbanes–Oxley Act as a secondary quasi‐natural experiment. Finally, we examine several scenarios that either amplify or attenuate the observed relation, based on factors such as financial constraints, distress, growth opportunities, industry competition, and other firm characteristics. Our study contributes to the literature that examines the interplay between corporate policy and product market relationships.