Buying Products from Whom You Know: Personal Connections and Information Asymmetry in Supply Chain Relationships

Review of Accounting Studies forthcoming

59 Pages Posted: 28 Jul 2017 Last revised: 13 Jul 2020

See all articles by Ting Chen

Ting Chen

University of Massachusetts Boston - College of Management

Hagit Levy

City University of New York - Stan Ross Department of Accountancy

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Ron Shalev

University of Toronto - Rotman School of Management

Date Written: July 10, 2020

Abstract

This study investigates the role pre-existing personal connections play in a crucial element of the supply chain – supplier selection. We find that the likelihood that a potential supplier (hereafter, a vendor) is selected to be an actual supplier (hereafter, supplier) increases when personal connections between executives of the vendor and the customer exist. The magnitude of the effect varies predictably across management ranks and positions and is stronger when information asymmetries between a vendor and a customer are high. Conditioning on the existence of a supply-chain partnership, a departure of a personally connected executive precipitates the termination of the supply-chain relationship more than a departure of an unconnected executive. Additional analyses show personal connections are associated with less restrictive procurement-contract terms and with improved customer performance after the formation of a supply-chain relationship. Overall, our study highlights the role of personal connections in reducing information asymmetry and improving operating efficiency in the supply chain.

Keywords: Personal connections, Supplier selection, Supply chain, Information asymmetry

JEL Classification: G32, G34, L1, M11

Suggested Citation

Chen, Ting and Levy, Hagit and Martin, Xiumin and Shalev, Ron, Buying Products from Whom You Know: Personal Connections and Information Asymmetry in Supply Chain Relationships (July 10, 2020). Review of Accounting Studies forthcoming , Available at SSRN: https://ssrn.com/abstract=3010000 or http://dx.doi.org/10.2139/ssrn.3010000

Ting Chen

University of Massachusetts Boston - College of Management ( email )

Boston, MA
United States

Hagit Levy

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Xiumin Martin (Contact Author)

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Ron Shalev

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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