Customer-Supplier Interactions and Expected Returns

60 Pages Posted: 2 Jan 2019 Last revised: 24 Jun 2021

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Date Written: December 1, 2020

Abstract

Supply chain interactions are a critical aspect of any firm's competitive strategy, and involve both input price negotiations and complementary investment decisions. This paper provides a model of strategic investment that predicts how customers match with suppliers, and how the way in which customers and suppliers strategically allocate joint profits affects firms' valuations and expected returns. We find that firms with greater impatience to invest --due to less diversified sales, smaller scale of production, or binding competitive threats in their product market-- extract less supply-chain profit. Crucially, these firms are not only less valuable, but also earn lower expected returns.

Keywords: Supply Chain, Expected Returns, Investment, Customers, Suppliers, Bargaining.

JEL Classification: G11, G12, G31, L11, L14, L22

Suggested Citation

Bustamante, Maria Cecilia, Customer-Supplier Interactions and Expected Returns (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3300964 or http://dx.doi.org/10.2139/ssrn.3300964

Maria Cecilia Bustamante (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

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