Syncing Innovation to Avoid Sinking: Supplier Response to Customer Covenant Violations

85 Pages Posted: 2 Sep 2020 Last revised: 15 Oct 2020

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: September 4, 2020

Abstract

When customers face financing frictions, they are incentivized to retain suppliers through nonmonetary incentives, such as by sharing technology with suppliers, thereby fostering supplier innovation. Using customer-supplier pairs in the U.S., we find that suppliers of customers that violate covenants become more innovative, specialize in narrow areas, and exhibit greater tendencies to cite and coordinate with customer innovation. Additionally, supplier innovation increases more when suppliers have greater financing flexibility, customers are highly specialized and stakeholder-friendly, and both trading partners are more trustworthy. Such innovation positively influences customer relationships, supplier performance, and supplier-firm survival. Overall, our findings illustrate nonmonetary channels that motivate relationship-specific investments.

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, Syncing Innovation to Avoid Sinking: Supplier Response to Customer Covenant Violations (September 4, 2020). 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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