The Disciplinary Role of Major Corporate Customers
46 Pages Posted: 6 Jan 2021 Last revised: 21 Mar 2024
Date Written: March 15, 2024
Abstract
We examine whether major corporate customers can help deter corporate misconduct among their suppliers. Our findings indicate that, in equilibrium, firms with concentrated customer bases are less likely to commit misconduct, and they pay lower penalties. Using an event study based on the establishment of trade relationships, we show that this negative equilibrium relation reflects both bonding by the suppliers and monitoring by the major customers. Furthermore, the disciplinary effect of major customers is more pronounced when customer demand for reducing supplier misconduct risk is higher. Additional analyses reveal that firms with major customers demonstrate better ESG practices that promote supply-chain sustainability and that major customers exercise their exit option to penalize suppliers after acute violations. Overall, our results suggest that major customers do discipline suppliers.
Keywords: Corporate misconduct, major customer, supplier misconduct risk, ESG, sustainability.
JEL Classification: M40, M41, G32, L14.
Suggested Citation: Suggested Citation