TY - JOUR
T1 - When ignorance is not bliss
T2 - An empirical analysis of subtier supply network structure on firm risk
AU - Wang, Yixin
AU - Li, Jun
AU - Wu, Di
AU - Anupindi, Ravi
N1 - Funding Information:
History: Accepted by Vishal Gaur, operations management. Funding: This work was supported by the National Science Foundation, Division of Civil, Mechanical and Manufacturing Innovation [Grant 1547987]. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2020.3645.
Publisher Copyright:
© 2020 INFORMS
PY - 2021/4
Y1 - 2021/4
N2 - 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.
AB - 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.
KW - Subtier supply network
KW - Supply chain risk management
KW - Supply network structure
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U2 - 10.1287/mnsc.2020.3645
DO - 10.1287/mnsc.2020.3645
M3 - Article
AN - SCOPUS:85095769754
VL - 67
SP - 2029
EP - 2048
JO - Management Science
JF - Management Science
SN - 0025-1909
IS - 4
ER -