CEO Turnovers and Disruptions in Customer–Supplier Relationships

Abstract

Events that disrupt customer–supplier relationships pose a source of risk for suppliers that depend on a customer for a large portion of their revenues. We identify the replacement of a customer’s chief executive officer (CEO) as a disruptive event that results in suppliers losing substantial sales. These losses are greater when an incumbent customer CEO is more likely to be entrenched and stem largely from the successor divesting assets. Finally, we document that losses in sales following a customer CEO turnover lead to declines in a supplier’s financial performance and that suppliers experience negative abnormal stock returns to announcements of customer CEO departures.

Firm Unionization and Disruptions in Customer Relationships*

“…Prior literature suggests that firms with a substantial portion of their revenues derived from a few large customers may experience benefits, such as greater operational efficiencies and visibility (Kalwani and Narayandas 1995;Patatoukas 2012;Cen et al 2016). As such, disruptions in established supply chain relationships represent a significant source of risk and can be detrimental to supplier firm performance (Intintoli et al 2017). Prior research finds that disruptions are often caused by factors in a supplier's external environment, such as macroeconomic shocks or alternate sourcing decisions by customers (Intintoli et al 2017;Cen et al 2016).…”

“…As such, disruptions in established supply chain relationships represent a significant source of risk and can be detrimental to supplier firm performance (Intintoli et al 2017). Prior research finds that disruptions are often caused by factors in a supplier's external environment, such as macroeconomic shocks or alternate sourcing decisions by customers (Intintoli et al 2017;Cen et al 2016). However, supplier-level events that could jeopardize a supplier's relationships with its major customers have been relatively unexplored.…”

“…Recent studies in this area have focused on disruptive events in the supply chain. For example, Intintoli et al (2017) find that customer CEO turnover disrupts relationships with existing suppliers. Cen et al (2016) find that suppliers who reduce the threat of takeovers are able to strengthen their relationships with existing customers.…”

Customer Concentration of Targets in Mergers and Acquisitions

“…Irvine et al (2016) argue that the effects of customer concentration vary with the maturity of major customer relationships, reporting evidence that the relation between customer concentration and profitability is negative in the early years of the relationship but positive in later years. In related literature, supplier-customer relationship age is also used as a proxy for relationship specific investment (RSI) and switching costs (e.g., Banerjee, Dasgupta, and Kim 2007;Brown, Fee, and Thomas 2009;Intintoli, Serfling, and Shaikh 2017). Customers and suppliers in long-term relationships are more likely to have made investments specific to the relationship, which increases the costs to the customer of switching to a new supplier.…”

“…3 When deciding to make an offer, the acquiring firm obtains private information and assesses various aspects of target risks (Perry and Herd 2004). The information gathered via due diligence may to some degree decrease information asymmetry but does not fully eliminate information 2 For example, Intintoli, Serfling, and Shaikh (2017) find that a change in a customer's CEO disrupts the customersupplier relationship such that suppliers lose substantial sales following the change. 3 Our predictions are based on information asymmetry which arises through asymmetric uncertainty related to customer concentration.…”