When Ignorance is Not Bliss: An Empirical Analysis of Sub-tier Supply Network Structure on Firm Risk

49 Pages Posted: 20 Dec 2015 Last revised: 17 Sep 2019

See all articles by Yixin (Iris) Wang

Yixin (Iris) Wang

University of Illinois at Urbana-Champaign - Department of Business Administration

Jun Li

University of Michigan, Stephen M. Ross School of Business

Di (Andrew) Wu

University of Michigan, Stephen M. Ross School of Business

Ravi Anupindi

University of Michigan, Stephen M. Ross School of Business

Date Written: September 15, 2019

Abstract

Using a multi-tier mapping of supply chain relationships constructed from granular global, firm-to-firm supplier--customer linkages data, we quantify the degree of financial risk propagation from the supply network beyond firms' direct supply chain connections and isolate structural network properties serving as significant moderators of risk propagation. We first document a baseline fact: a significant proportion of tier-2 suppliers are shared by tier-1 suppliers. We then construct two simple metrics to capture the degree of tier-2 sharing and disentangle its effect from tier-2 suppliers' own risks. We show that the focal firms' risk levels are significantly related to the proportion of shared tier-2 suppliers in their supply network, and the effect becomes monotonically stronger as their tier-2 suppliers become more highly shared. Finally, we uncover causal relationships behind these associations using a new source of exogenous, idiosyncratic risk events in an event study setting. We show that as tier-2 suppliers are impacted by these events, focal firms experience negative abnormal returns, the magnitude of which is significantly larger when the impacted tier-2 suppliers are more heavily shared. Overall, our study uncovers the sub-tier network structure as an important risk source for the focal firm, with the degree of tier-2 sharing as the main moderator. Our results also provide the microfoundation for a common structure in idiosyncratic risks and suggest the importance of incorporating the effect of sub-tier supply network structure in the portfolio optimization process.

Keywords: Supply Chain Risk Management, Supply Network Structure, Sub-tier Supply Network

Suggested Citation

Wang, Yixin (Iris) and Li, Jun and Wu, Di and Anupindi, Ravi, When Ignorance is Not Bliss: An Empirical Analysis of Sub-tier Supply Network Structure on Firm Risk (September 15, 2019). Ross School of Business Paper No. 1297. Available at SSRN: https://ssrn.com/abstract=2705654 or http://dx.doi.org/10.2139/ssrn.2705654

Yixin (Iris) Wang

University of Illinois at Urbana-Champaign - Department of Business Administration ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jun Li (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Di Wu

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Ravi Anupindi

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734.615.8621 (Phone)

HOME PAGE: http://michiganross.umich.edu/faculty-research/faculty/ravi-anupindi

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