Chained Innovation: Response to Customer Covenant Violations
64 Pages Posted: 2 Sep 2020 Last revised: 11 Jan 2022
Date Written: January 10, 2022
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: Suggested Citation