50 Pages Posted: 21 Mar 2011 Last revised: 3 Feb 2016
Date Written: October 1, 2015
A firm’s customers and suppliers make relationship-specific investments (RSI) whose value reduces if the firm undertakes risky investments. We hypothesize that the risk-taking incentives in the firm CEO’s compensation will lower the RSI by firms up and down in the vertical channel. We provide significant evidence that customer/supplier RSI declines with the risk-taking incentives of the firm’s CEO. Moreover, we find that RSI is more sensitive to the CEO’s risk-taking incentives when they are more likely to increase the firm’s cash flow volatility. Our findings are robust to correcting for endogeneity and several measures for RSI and risk taking.
Keywords: Product Markets, Compensation, Risk Taking, Vertical Channel, Relationship Specific Investment
JEL Classification: G30
Suggested Citation: Suggested Citation
Kale, Jayant R. and Kedia, Simi and Williams, Ryan, The Effect of CEO’s Risk-Taking Incentives on Relationship-Specific Investments by Customers and Suppliers (October 1, 2015). Available at SSRN: https://ssrn.com/abstract=1787113 or http://dx.doi.org/10.2139/ssrn.1787113
By Kevin Murphy