Trickle-Down Overconfidence: The Impact of Customer Overconfidence on Supplier Firms

27 Pages Posted: 21 Oct 2019

See all articles by Aaron Nelson

Aaron Nelson

UT El Paso

Andrew Schwartz

University of Georgia - Department of Finance

Date Written: October 10, 2019

Abstract

Economic research has long focused on how individual behavioral biases can create spillover effects. In this paper, we consider why CEO overconfidence impacts other firms in the supply chain. Using data on supplier-customer relationships, we examine how suppliers respond to overconfident customers. We find that suppliers to overconfident customers increase their relationship-specific investment compared to suppliers paired with non-overconfident customers. The effect, however, is attenuated when the customer firms exhibit high-levels of riskiness. We further find no evidence that suppliers become overconfident themselves in response to overconfident customers. These results suggest that increases in supplier investment are not driven by overconfidence spilling over to suppliers. Instead, it appears that increases in supplier investment are driven by a rational response to an expected increase in demand from overconfident customers.

Keywords: Corporate Investment, CEO Overconfidence, Supply Chain

JEL Classification: D22, G31, L14

Suggested Citation

Nelson, Aaron and Schwartz, Andrew, Trickle-Down Overconfidence: The Impact of Customer Overconfidence on Supplier Firms (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3467793 or http://dx.doi.org/10.2139/ssrn.3467793

Aaron Nelson

UT El Paso ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

Andrew Schwartz (Contact Author)

University of Georgia - Department of Finance ( email )

600 S. Lumpkin Street
Amos Hall, B314
Athens, GA 30602
United States

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