The Spillover Effect of Customer CEO Myopia on Supplier Firms

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