Chained Innovation: Response to Customer Covenant Violations

64 Pages Posted: 2 Sep 2020 Last revised: 11 Jan 2022

See all articles by Srinivasan Selvam

Srinivasan Selvam

Peking University - HSBC Business School

Kelvin Jui Keng Tan

University of Queensland - Business School; Financial Research Network (FIRN)

Date Written: January 10, 2022

Abstract

Financing frictions increase customers’ marginal net benefits from technology sharing with suppliers as seeking supplier cooperation and reducing costs become significant concerns, thereby increasing collaboration and supplier innovation. Using U.S. data, we find that suppliers of customers violating loan covenants become more innovative, specialize in niche areas, and exhibit greater tendencies to cite and coordinate their own innovation with the customer’s. These gains are stronger when suppliers have greater financing flexibility and when customers are highly specialized and trustworthy. In addition, innovative suppliers seem to thrive following customer covenant violations. Overall, our evidence indicates that customer financing frictions shape their suppliers’ relationship-specific investments and innovation.

Keywords: Innovation, Customer-Supplier Relationship, Debt Covenant Violations, Firm Performance

JEL Classification: O30, L14, L24, G32, G33

Suggested Citation

Selvam, Srinivasan and Tan, Kelvin Jui Keng, Chained Innovation: Response to Customer Covenant Violations (January 10, 2022). Available at SSRN: https://ssrn.com/abstract=3659886 or http://dx.doi.org/10.2139/ssrn.3659886

Srinivasan Selvam (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

Kelvin Jui Keng Tan

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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