Managing firm risk: supply chain board members and the contingent effects of firm network architectures

Demand-supply mismatch is considered one of the most important factors that drives firm risk. Nevertheless, the difficulties in quantifying firms’ capability and ambition to deal with demand-supply mismatch drive external investors to seek valuable signals to guide investment decisions. Drawing on signaling theory, we identified supply chain board members (SCBMs) – the presence of directors of customer and supplier organizations in a focal firm’s boardroom as an effective approach to attenuate demand-supply mismatch, and accordingly indicate lower firm risk. Through a panel dataset of 1681 manufacturing firms listed in the North American market from 2010 to 2020, we empirically analyzed the effects of supply chain board members on firm idiosyncratic volatility. We found that firms with supply chain members in their boardrooms are accompanied by lower idiosyncratic volatility than those without SCBMs. We further discussed the effects of supply chain network architectures as critical signaling environments on SCBMs. The regression results indicated that the signal of SCBMs is strengthened under high eigenvector centrality, but weakened by a high level of structural holes. This study extends conventional risk evaluation literature by theorizing one type of inter-organizational relationship, SCBMs, as an effective signal of collaborative intention and commitment, which proxies a focal firm’s capability and ambition to build collective strength with external investors and stakeholders to lower firm risk. Our findings are robust under several additional tests, e.g., propensity scores matching, instrument variable regression, and Heckman’s two-stage regression.