The Spillover Effect of Customer CEO Myopia on Supplier Firms

34 Pages Posted: 6 Apr 2020 Last revised: 7 Jan 2022

See all articles by Yifan Jia

Yifan Jia

NanKai University

Zheng Wang

City University of Hong Kong

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Zilong Zhang

Zhejiang University

Date Written: February 15, 2020

Abstract

Customers' noncooperative behaviors hold up suppliers' incentives to make relationship-specific investments, hurting supply chain relationships. This paper explores how customer CEOs' myopia induced by their short-term incentives, as one of the important causes of noncooperative behaviors, affect the suppliers' supply chain relationship-specific investments. Using customer CEOs' vesting equity as a proxy for their myopia, we argue that such myopia imposes a negative spillover effect on the real investment decisions of their supplier firms. Specifically, we hypothesize that customer CEOs' vesting equity is negatively associated with suppliers' investments in R&D expenditures. The main results support our predictions, which also holds when we control the customers' own R&D or capital expenditures resulting from customer CEOs' short-term incentives. Furthermore, we find that customer CEOs' myopia has a less pronounced effect on reducing suppliers' R&D investments when the customers have less bargaining power, are considered more trustworthy, or are subject to greater supervision by blockholders. The effect is also less pronounced when the suppliers have higher capital redeployability. At last, we show that supplier firms facing downstream myopia also reduce their trade credit offering and inventory cost, hurting supply chain coordination.

Keywords: management myopia, relatioship-specific investment, incomplete contract, supply chain

JEL Classification: G31, G32, G34, L14, M12

Suggested Citation

Jia, Yifan and Wang, Zheng and Wu, Jing and Zhang, Zilong, The Spillover Effect of Customer CEO Myopia on Supplier Firms (February 15, 2020). Available at SSRN: https://ssrn.com/abstract=3538613 or http://dx.doi.org/10.2139/ssrn.3538613

Yifan Jia

NanKai University ( email )

94 Weijin Road, Tianjin
Tianjin
China

Zheng Wang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Jing Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

Zilong Zhang

Zhejiang University ( email )

Yuhangtang Road 866
Hangzhou, Zhejiang 310058
China

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