The Disciplinary Role of Major Corporate Customers
58 Pages Posted: 6 Jan 2021 Last revised: 14 Feb 2022
Date Written: February 14, 2022
We examine whether economic links with major corporate customers, an important group of strong stakeholders, act as a deterrent to corporate misconduct. We show that firms with a concentrated customer base are less likely to commit misconduct, and they pay lower penalties. Moreover, we show that this disciplinary effect is stronger in the presence of events that increase customer bargaining power, intensify customer scrutiny, or arouse customer awareness of supplier misconduct risk. Consistent with a risk-management motive on the part of customers, we find that the negative effect of customer concentration on misconduct is more pronounced when perceived supplier misconduct risk is higher, but firms with major customers do not appear to engage in more corporate goodness. Exploring underlying economic mechanisms, we find that firms with major customers exhibit better worker safety and more employee-friendly workplace practices. We also provide suggestive evidence that major customers curb supplier misconduct through both external influence and internal control. Overall, our evidence suggests that major corporate customers can effectively discipline managerial behavior.
Keywords: Corporate misconduct, customer, supplier, stakeholder, risk management.
JEL Classification: M40, M41, G32, L14.
Suggested Citation: Suggested Citation