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Do Social Connections Mitigate Hold-up and Facilitate Cooperation? Evidence from Supply Chain Relationships

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  • Dasgupta, Sudipto
  • Zhang, Kuo
  • Zhu, Chenqi

Abstract

We show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete. We examine vertical relationships and show that relation-specific innovative activities by suppliers increase with the existence and strength of prior social connections between the suppliers’ managers and board members and those of their customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths and find that innovation drops for affected suppliers after the departure of socially connected individuals relative to unaffected suppliers. Our work sheds light on how social connections can shape firm boundaries.

Suggested Citation

  • Dasgupta, Sudipto & Zhang, Kuo & Zhu, Chenqi, 2021. "Do Social Connections Mitigate Hold-up and Facilitate Cooperation? Evidence from Supply Chain Relationships," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(5), pages 1679-1712, August.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:5:p:1679-1712_6
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    Cited by:

    1. Jiangming Ma & Di Gao, 2023. "The Impact of Sustainable Supply-Chain Partnership on Bank Loans: Evidence from Chinese-Listed Firms," Sustainability, MDPI, vol. 15(6), pages 1-25, March.
    2. Qian, Xianhang & Qiu, Shanyun, 2023. "Political risk and corporate international supply chain," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. 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).
    4. Yi, Zhaoying & Xu, Xiaowei & Wei, Minghai & Lin, Bingxuan, 2023. "Foreign institutional ownership externalities and supplier innovation," Journal of Corporate Finance, Elsevier, vol. 80(C).

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