IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v26y2021i4d10.1007_s11142-020-09578-1.html
   My bibliography  Save this article

Buying products from whom you know: personal connections and information asymmetry in supply chain relationships

Author

Listed:
  • Ting Chen

    (University of Massachusetts Boston)

  • Hagit Levy

    (Zicklin School of Business, Baruch College & UTSC)

  • Xiumin Martin

    (Washington University in St. Louis)

  • Ron Shalev

    (University of Toronto)

Abstract

This study investigates the role personal connections play in a crucial element of the supply chain—supplier selection. We find that the likelihood that a potential supplier (hereafter, a vendor) is selected to be an actual supplier (hereafter, supplier) increases when personal connections between executives of the vendor and the customer exist. The magnitude of the effect varies predictably across management ranks and positions and is stronger when information asymmetries between a vendor and a customer are high. Conditioning on the existence of a supply-chain partnership, a departure of a personally connected executive prompts the termination of the supply-chain relationship more often than a departure of an unconnected executive. Additional analyses show personal connections are associated with less restrictive procurement contracts and with improved customer performance after the formation of a supply-chain relationship. Overall, our study highlights the role of personal connections in reducing information asymmetry and improving operating efficiency in the supply chain.

Suggested Citation

  • Ting Chen & Hagit Levy & Xiumin Martin & Ron Shalev, 2021. "Buying products from whom you know: personal connections and information asymmetry in supply chain relationships," Review of Accounting Studies, Springer, vol. 26(4), pages 1492-1531, December.
    • Handle: RePEc:spr:reaccs:v:26:y:2021:i:4:d:10.1007_s11142-020-09578-1
    DOI: 10.1007/s11142-020-09578-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-020-09578-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-020-09578-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hui, Kai Wai & Klasa, Sandy & Yeung, P. Eric, 2012. "Corporate suppliers and customers and accounting conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 115-135.
    2. Duchin, Ran & Sosyura, Denis, 2014. "Safer ratios, riskier portfolios: Banks׳ response to government aid," Journal of Financial Economics, Elsevier, vol. 113(1), pages 1-28.
    3. Serel, Dogan A. & Dada, Maqbool & Moskowitz, Herbert, 2001. "Sourcing decisions with capacity reservation contracts," European Journal of Operational Research, Elsevier, vol. 131(3), pages 635-648, June.
    4. Ryan Ball & Robert M. Bushman & Florin P. Vasvari, 2008. "The Debt‐Contracting Value of Accounting Information and Loan Syndicate Structure," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 247-287, May.
    5. Lauren Cohen & Andrea Frazzini & Christopher Malloy, 2008. "The Small World of Investing: Board Connections and Mutual Fund Returns," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 951-979, October.
    6. Ittner, Christopher D. & Larcker, David F. & Nagar, Venkatesh & Rajan, Madhav V., 1999. "Supplier selection, monitoring practices, and firm performance," Journal of Accounting and Public Policy, Elsevier, vol. 18(3), pages 253-281, September.
    7. Wittenberg-Moerman, Regina, 2008. "The role of information asymmetry and financial reporting quality in debt trading: Evidence from the secondary loan market," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 240-260, December.
    8. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    9. Nina Boyarchenko & Anna M. Costello, 2014. "Counterparty risk in material supply contracts," Staff Reports 694, Federal Reserve Bank of New York.
    10. Volodymyr Babich & Apostolos N. Burnetas & Peter H. Ritchken, 2007. "Competition and Diversification Effects in Supply Chains with Supplier Default Risk," Manufacturing & Service Operations Management, INFORMS, vol. 9(2), pages 123-146, October.
    11. Cesare Fracassi & Geoffrey Tate, 2012. "External Networking and Internal Firm Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 153-194, February.
    12. Kale, Jayant R. & Shahrur, Husayn, 2007. "Corporate capital structure and the characteristics of suppliers and customers," Journal of Financial Economics, Elsevier, vol. 83(2), pages 321-365, February.
    13. Ravi Anupindi & Ram Akella, 1993. "Diversification Under Supply Uncertainty," Management Science, INFORMS, vol. 39(8), pages 944-963, August.
    14. Brian Tomlin, 2006. "On the Value of Mitigation and Contingency Strategies for Managing Supply Chain Disruption Risks," Management Science, INFORMS, vol. 52(5), pages 639-657, May.
    15. Engelberg, Joseph & Gao, Pengjie & Parsons, Christopher A., 2012. "Friends with money," Journal of Financial Economics, Elsevier, vol. 103(1), pages 169-188.
    16. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
    17. Ho, William & Xu, Xiaowei & Dey, Prasanta K., 2010. "Multi-criteria decision making approaches for supplier evaluation and selection: A literature review," European Journal of Operational Research, Elsevier, vol. 202(1), pages 16-24, April.
    18. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    19. Sameer Hasija & Edieal J. Pinker & Robert A. Shumsky, 2008. "Call Center Outsourcing Contracts Under Information Asymmetry," Management Science, INFORMS, vol. 54(4), pages 793-807, April.
    20. Volodymyr Babich, 2006. "Vulnerable options in supply chains: Effects of supplier competition," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(7), pages 656-673, October.
    21. Liu, Fuh-Hwa Franklin & Hai, Hui Lin, 2005. "The voting analytic hierarchy process method for selecting supplier," International Journal of Production Economics, Elsevier, vol. 97(3), pages 308-317, September.
    22. Duchin, Ran & Sosyura, Denis, 2012. "The politics of government investment," Journal of Financial Economics, Elsevier, vol. 106(1), pages 24-48.
    23. Ran Duchin & Denis Sosyura, 2013. "Divisional Managers and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 68(2), pages 387-429, April.
    24. Cesare Fracassi, 2017. "Corporate Finance Policies and Social Networks," Management Science, INFORMS, vol. 63(8), pages 2420-2438, August.
    25. Ali Hortaçsu & F. Asís Martínez-Jerez & Jason Douglas, 2009. "The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 53-74, February.
    26. Gerard Hoberg & Gordon Phillips, 2016. "Text-Based Network Industries and Endogenous Product Differentiation," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1423-1465.
    27. Costello, Anna M., 2013. "Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 19-39.
    28. David Aboody & John Hughes & Jing Liu, 2005. "Earnings Quality, Insider Trading, and Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 43(5), pages 651-673, December.
    29. Winter, Sidney G, 1988. "On Coase, Competence, and the Corporation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 163-180, Spring.
    30. Jesse A. Ellis & C. Edward Fee & Shawn E. Thomas, 2012. "Proprietary Costs and the Disclosure of Information About Customers," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 685-727, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hasan, Iftekhar & Manfredonia, Stefano, 2022. "Productivity, managers’ social connections and the financial crisis," Journal of Banking & Finance, Elsevier, vol. 141(C).
    2. Ferracuti, Elia, 2022. "Information uncertainty and organizational design," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    3. Wang, Kemin & Zhang, Guanglong & Zhou, Lin, 2023. "Managerial disposition effect: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    4. Ding, Feng & Liu, Qiliang & Shi, Hanzhong & Wang, Wenming & Wu, Shan, 2023. "Firms' access to informal financing: The role of shared managers in trade credit access," Journal of Corporate Finance, Elsevier, vol. 79(C).
    5. Jandik, Tomas & Salikhova, Tatiana, 2023. "The effect of social connections on capital structure in supplier-customer relationships11We are grateful for the helpful comments from Jason Damm, Abhi Ganguly, Scott Hsu, Ankit Kalda, Wayne Lee, Pau," Journal of Corporate Finance, Elsevier, vol. 79(C).
    6. Yuqiang Cao & Weiming Liang & Guocheng Yang & Jun Yin, 2022. "Judicial Independence and Domestic Supply Chain: Evidence from a Quasi-Natural Experiment," Sustainability, MDPI, vol. 14(24), pages 1-17, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Duchin, Ran & Martin, Xiumin & Michaely, Roni & Wang, Hanmeng, 2022. "Concierge treatment from banks: Evidence from the paycheck protection program," Journal of Corporate Finance, Elsevier, vol. 72(C).
    2. Kirsten Tangaa Nielsen & Felix von Meyerinck, 2018. "Managerial Networks and Shareholder Value: Evidence from Sudden Deaths," Working Papers on Finance 1821, University of St. Gallen, School of Finance.
    3. Ting Luo & Jianqiao Yu, 2019. "Friends along supply chain and relationship-specific investments," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 895-931, October.
    4. Jandik, Tomas & Salikhova, Tatiana, 2023. "The effect of social connections on capital structure in supplier-customer relationships11We are grateful for the helpful comments from Jason Damm, Abhi Ganguly, Scott Hsu, Ankit Kalda, Wayne Lee, Pau," Journal of Corporate Finance, Elsevier, vol. 79(C).
    5. Ma, Xiaofang & Wang, Wenming & Wu, Jiangang & Zhang, Wenlan, 2020. "Corporate customer concentration and stock price crash risk," Journal of Banking & Finance, Elsevier, vol. 119(C).
    6. Jing, Wei & Zhang, Xueyong, 2021. "Online social networks and corporate investment similarity," Journal of Corporate Finance, Elsevier, vol. 68(C).
    7. Genc, Egemen & Shirley, Sara E. & Stark, Jeffrey R. & Tran, Hai, 2023. "Finding information in obvious places: Work connections and mutual fund investment ideas," Journal of Financial Markets, Elsevier, vol. 63(C).
    8. David Schoenherr, 2019. "Political Connections and Allocative Distortions," Journal of Finance, American Finance Association, vol. 74(2), pages 543-586, April.
    9. Houston, Joel F. & Lee, Jongsub & Suntheim, Felix, 2018. "Social networks in the global banking sector," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 237-269.
    10. Fang, Ming & Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2022. "External social networks and earnings management," The British Accounting Review, Elsevier, vol. 54(2).
    11. Agnes C. S. Cheng & Wenli Huang & Shaojun Zhang, 2020. "Major government customer and management earnings forecasts," Frontiers of Business Research in China, Springer, vol. 14(1), pages 1-20, December.
    12. Chahine, Salim & Fang, Yiwei & Hasan, Iftekhar & Mazboudi, Mohamad, 2019. "Entrenchment through corporate social responsibility: Evidence from CEO network centrality," International Review of Financial Analysis, Elsevier, vol. 66(C).
    13. Jarrad Harford & Robert Schonlau & Jared Stanfield, 2019. "Trade Relationships, Indirect Economic Links, and Mergers," Management Science, INFORMS, vol. 65(7), pages 3085-3110, July.
    14. Togan Egrican, Aslı, 2021. "Overlapping board connections with banker directors and corporate loan terms: Evidence from syndicated loans," Global Finance Journal, Elsevier, vol. 50(C).
    15. Amin, Abu & Chourou, Lamia & Kamal, Syed & Malik, Mahfuja & Zhao, Yang, 2020. "It’s who you know that counts: Board connectedness and CSR performance," Journal of Corporate Finance, Elsevier, vol. 64(C).
    16. Griffin, Paul A. & Hong, Hyun A. & Liu, Yun & Ryou, Ji Woo, 2021. "The dark side of CEO social capital: Evidence from real earnings management and future operating performance," Journal of Corporate Finance, Elsevier, vol. 68(C).
    17. Klusak, Patrycja & Thornton, John & Uymaz, Yurtsev, 2020. "Do personal connections improve sovereign credit ratings?," Finance Research Letters, Elsevier, vol. 33(C).
    18. Ferris, Stephen P. & Javakhadze, David & Liu, Yun, 2020. "The price of boardroom social capital: The effects of corporate demand for external connectivity," Journal of Banking & Finance, Elsevier, vol. 111(C).
    19. Rahaman, Mohammad M. & Rau, P. Raghavendra & Zaman, Ashraf Al, 2020. "The effect of supply chain power on bank financing," Journal of Banking & Finance, Elsevier, vol. 114(C).
    20. Brian Tomlin, 2009. "Disruption‐management strategies for short life‐cycle products," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(4), pages 318-347, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:26:y:2021:i:4:d:10.1007_s11142-020-09578-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.