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The Effect of CEO’s Risk-Taking Incentives on Relationship-Specific Investments by Customers and Suppliers

50 Pages Posted: 21 Mar 2011 Last revised: 3 Feb 2016

Jayant R. Kale

Northeastern University

Simi Kedia

Rutgers Business School

Ryan Williams

University of Arizona - Department of Finance

Date Written: October 1, 2015

Abstract

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

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

Jayant Kale

Northeastern University ( email )

Boston, MA 02115
United States

Simi Kedia (Contact Author)

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Ryan Williams

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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