The Spillover Effect of Customer CEO Myopia on Supplier Firms

38 Pages Posted: 6 Apr 2020 Last revised: 31 Jul 2020

See all articles by Yifan Jia

Yifan Jia

City University of Hong Kong (CityUHK)

Zheng Wang

City University of Hong Kong

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Zilong Zhang

City University of Hong Kong

Date Written: February 15, 2020

Abstract

This paper shows that customer CEOs’ short-term equity incentives impose a negative spillover effect on the real investment decisions of their supplier firms. Specifically, we find that CEOs’ short-term incentives, measured by CEOs’ vesting equity in a given quarter, are negatively associated with suppliers’ investments in R&D expenditures in the same quarter. The reduction of suppliers’ R&D is not fully explained by the decline in customers’ own R&D or capital expenditures resulting from customer CEOs’ short-term incentives. Furthermore, we find that customer CEOs’ short-term incentives have a less pronounced effect on reducing suppliers’ R&D investments when the customers have less bargaining power, are younger, are considered more trustworthy, or are monitored by blockholders. The effect is also less pronounced when the suppliers have higher capital redeployability. At last, we show that supplier firms also reduce their trade credit offering and inventory cost. Taken together, we argue that customer CEOs’ myopic behavior, induced by their short-term incentives, reduces suppliers’ incentive to commit to relationship-specific investments.

Keywords: management myopia, relatioship-specific investment, incomplete contract, supply chain

JEL Classification: G31, G32, G34, L14, M12

Suggested Citation

Jia, Yifan and Wang, Zheng and Wu, Jing and Zhang, Zilong, The Spillover Effect of Customer CEO Myopia on Supplier Firms (February 15, 2020). Available at SSRN: https://ssrn.com/abstract=3538613 or http://dx.doi.org/10.2139/ssrn.3538613

Yifan Jia

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Zheng Wang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Jing Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

Zilong Zhang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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