Corporate Environmental Risk and the Customer-Supplier Relationship

Abstract

We provide empirical evidence on the adverse effects of supplier firms’ environmental risk exposures on their relationships with principal customers. We document that supplier firms with high environmental risk are less likely to have principal customers. Moreover, from the principal customers’ perspective, a higher level of environmental risk lowers a supplier firm’s probability of being selected relative to its industry peers by its potential customer. Conditional on an ongoing relationship with principal customers, supplier firms with high environmental risk have lower sales to principal customers and shorter relationship durations. These results are more pronounced when customers’ environmental risk is lower. Collectively, our findings suggest that improving the trading relationship with principal customers is an important channel through which firms can benefit economically from being environmentally responsible.

Keywords: corporate social responsibility, product market competition, environmental risk, customer-supplier relationship

JEL Classification: G32, L21