When ignorance is not bliss: An empirical analysis of subtier supply network structure on firm risk

Yixin Wang, Jun Li, Di Wu, Ravi Anupindi

Research output: Contribution to journalArticlepeer-review

Abstract

Using a multitier mapping of supply-chain relationships constructed from granular global, firm-to-firm supplier–customer linkages data, we quantify the degree of financial risk propagation from the supply network beyond firms’ direct supply-chain connections and isolate structural network properties serving as significant moderators of risk propagation. We first document a baseline fact: a significant proportion of tier-2 suppliers are shared by tier-1 suppliers. We then construct two simple metrics to capture the degree of tier-2 sharing and disentangle its effect from tier-2 suppliers’ own risks. We show that the focal firms’ risk levels are significantly related to the proportion of shared tier-2 suppliers in their supply network, and the effect becomes monotonically stronger as their tier-2 suppliers become more highly shared. Finally, we uncover causal relationships behind these associations using a new source of exogenous, idiosyncratic risk events in an event study setting. We show that, as tier-2 suppliers are impacted by these events, focal firms experience negative abnormal returns, the magnitude of which is significantly larger when the impacted tier-2 suppliers are more heavily shared. Overall, our study uncovers the subtier network structure as an important risk source for the focal firm, with the degree of tier-2 sharing as the main moderator. Our results also provide the microfoundation for a common structure in idiosyncratic risks and suggest the importance of incorporating the effect of subtier supply network structure in the portfolio-optimization process.

Original languageEnglish (US)
Pages (from-to)2029-2048
Number of pages20
JournalManagement Science
Volume67
Issue number4
DOIs
StatePublished - Apr 2021

Keywords

  • Subtier supply network
  • Supply chain risk management
  • Supply network structure

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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