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Do Corporate Frauds Distort Suppliers’ Investment Decisions?

  • Cheng Yin
  • Xin ChengEmail author
  • Yinan Yang
  • Dan Palmon
Original Paper

Abstract

This study examines whether customer firms’ unethical behavior distorts suppliers’ investment decisions. Using litigation and restatement to measure unethical behavior, we find that suppliers with customers engaged in frauds tend to invest more during the cheating period, compared to unaffected suppliers. In cross-sectional analyses, we examine the moderating effect of suppliers’ reliance on customer information and peer information. Results show that more industry peers’ voluntary disclosures and analyst coverage, lower sales volatility, and lower relationship-specific investments mitigate the distortion effect on suppliers. Suppliers’ overinvestments caused by customers’ misreporting also lead to the suppliers’ inferior future performance and subsequent negative market reaction, and the severity of customers’ misreporting influences the magnitude of suppliers’ investment distortions. These results are robust in a dynamic difference-in-difference specification, an SEC enforcement sample, and a sample that excludes observations for suppliers and customers in the same industry. This paper contributes to the ethics literature by emphasizing the importance of creditable supply-chain information transfer to investment decisions and clarifying the nontrivial influence of principal customers in the supply-chain network.

Keywords

Corporate frauds Investment efficiency Supply-chain relationship 

Notes

Compliance with Ethical Standards

Conflict of interests

The authors declare that they have no conflict of interest.

Human and Animal Rights

The article does not contain any studies with human participants or animals performed by any of the authors.

Informed Consent

No participants are involved in this article. Informed consent requirement is not applicable.

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Copyright information

© Springer Nature B.V. 2020

Authors and Affiliations

  1. 1.Tsinghua UniversityBeijingChina
  2. 2.Renmin University of ChinaHaidianChina
  3. 3.Southwestern University of Finance and EconomicsChengduChina
  4. 4.Rutgers UniversityNewarkUSA

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