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

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.

Information aggregation to form earnings expectations: Evidence from CEO networks and management forecast accuracy

“…Because individual economic agents have 5 Hwang and Kim (2009), Fracassi andTate (2012), andEl-Khatib et al (2015) provide evidence of entrenchment. Negative effects on firm value have also been documented from relationships between an acquirer and target (Ishii & Xuan, 2014), customer and supplier (Chen et al, 2021), and the audit committee and the firm's auditor (He et al, 2015). 6 Intintoli et al (2018) provide evidence that the connectedness of a firm's audit committee is associated with higher financial reporting quality.…”

Vendor sustainability performance and corporate customers' supplier selection

“…Additionally, various studies have documented the impact of corporate sustainability on business decisions and practices, including investment decisions (Zheng et al, 2022), financing activities (El Ghoul et al, 2018; Luo et al, 2023), tax strategies (Velte, 2023), executive turnover (Burke, 2022; Dai et al, 2023), and executive misconduct (He et al, 2022). Corporate sustainability has also been recognized as a crucial topic in customer‐supplier relationships, especially given the prevalence of supply chain integration and outsourcing (Carter & Easton, 2011; Carter & Washispack, 2018; Chen et al, 2021). However, the effects of the sustainability performance of upstream firms on downstream firms' business decisions remain largely unexplored.…”

“…Supplier selection is a critical component of effective supply chain management (Chen et al, 2021). Extensive research has investigated factors ranging from conventional criteria to non‐traditional considerations that influence customer decisions when selecting suppliers (Chen et al, 2021; Chen & Huang, 2007; Ho et al, 2010; Liu et al, 2000).…”

“…Supplier selection is a critical component of effective supply chain management (Chen et al, 2021). Extensive research has investigated factors ranging from conventional criteria to non‐traditional considerations that influence customer decisions when selecting suppliers (Chen et al, 2021; Chen & Huang, 2007; Ho et al, 2010; Liu et al, 2000). The emergence of sustainable development as a key concept, and the growing complexity and risk associated with supply chain relationships, highlight the need for further investigation of supplier selection criteria in sustainable areas (Hutchins & Sutherland, 2008; McCarthy et al, 2013; Paulraj et al, 2017).…”

Judicial Independence and Domestic Supply Chain: Evidence from a Quasi-Natural Experiment

“…However, Thomas and Griffin find that suppliers located further away can increase firms' input-output efficiency [36]. Firms' supplier selection strategies do not depend solely on operating costs but also relate to factors such as the availability of a high-speed train line [18], personal connections [37], logistics quality, product quality, and supplier reputation. Market segmentation is another important factor and firms under local judicial protection are prone to choose closely located suppliers and are unwilling to choose suppliers from a different region as they may face the risk of judicial disputes [38,39].…”