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The Dark Side of Stakeholder Influence: The Surprising Effect of Customer Fraud on Suppliers

Author

Listed:
  • Banerjee, Shantanu
  • Dasgupta, Sudipto
  • Shi, Rui

Abstract

We show that influential stakeholders distort corporate policies when they cannot commit to a long-term relationship. Following the revelation of financial fraud by a major customer, suppliers surprisingly outperform a control group in terms of sales growth, Tobin’s Q and survival likelihood over a ten-year period. Our results suggest that, prior to the fraud revelation, managers’ short decision horizons and aversion to short-term risk or uncertainty enables influential customers to demand relationship-specific innovation when their bargaining power is stronger, leading to suboptimal diversification. When customer bargaining power weakens, suppliers engage in riskier and novel innovation, which diversifies the customer base.

Suggested Citation

  • Banerjee, Shantanu & Dasgupta, Sudipto & Shi, Rui, 2022. "The Dark Side of Stakeholder Influence: The Surprising Effect of Customer Fraud on Suppliers," CEPR Discussion Papers 16701, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16701
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    More about this item

    Keywords

    Playing it safe; Corporate fraud; Explorative innovation; Exploitative innovation; Supply chain;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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