Do Corporate Frauds Distort Suppliers’ Investment Decisions?

Cheng Yin, Xin Cheng, Yinan Yang, Dan Palmon

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)115-132
Number of pages18
JournalJournal of Business Ethics
Volume172
Issue number1
DOIs
StatePublished - Aug 2021

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Business, Management and Accounting(all)
  • Arts and Humanities (miscellaneous)
  • Economics and Econometrics
  • Law

Keywords

  • Corporate frauds
  • Investment efficiency
  • Supply-chain relationship

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