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Do Social Connections Mitigate Hold-up and Facilitate Cooperation? Evidence from Supply Chain Relationships

Published online by Cambridge University Press:  27 August 2020

Sudipto Dasgupta Open the ORCID record for Sudipto Dasgupta [Opens in a new window] ,
Kuo Zhang  and
Chenqi Zhu
Sudipto Dasgupta
Affiliation:
Chinese University of Hong Kong Business School, ABFER, and CEPR [email protected]
Kuo Zhang*
Affiliation:
Shanghai Jiao Tong University Antai College of Economics and [email protected]
Chenqi Zhu
Affiliation:
University of California Irvine Paul Merage School of [email protected]
*
[email protected] (corresponding author)
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Abstract

We show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete. We examine vertical relationships and show that relation-specific innovative activities by suppliers increase with the existence and strength of prior social connections between the suppliers’ managers and board members and those of their customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths and find that innovation drops for affected suppliers after the departure of socially connected individuals relative to unaffected suppliers. Our work sheds light on how social connections can shape firm boundaries.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 5 , August 2021 , pp. 1679 - 1712
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee, Utpal Bhattacharya, Xin Chang, DuckKi Cho, Yongqiang Chu, David De Angelis, Philip Dybvig, Janet Gao, Vidhan Goyal, Po-Hsuan Hsu, Chen Lin, Paul Malatesta (the editor), Roni Michaely, Abhiroop Mukherjee, Vik Nanda, Bin Qiu, Tao Shu, Dragon Tang, Shawn Thomas, Cong Wang, Wenyu Wang, Michael Weber, Alminas Zaldokas, Xueyong Zhang, and seminar participants at the Chinese University of Hong Kong, Erasmus University, Hong Kong University of Science and Technology, University of Cambridge, University of Hong Kong, University of Oxford, University of Reading, University of Strathclyde, Vienna Graduate School of Finance, and the 2015 Annual Corporate Finance Conference, 2015 Annual Entrepreneurial Finance and Innovation Conference, 2016 Centre for Economic Policy Research (CEPR) First Annual Spring Symposium in Financial Economics, 2016 China International Conference in Finance, 2016 European Finance Association Conference, 2017 China Finance Annual Meeting, 2018 Sun Yat-sen University Finance International Conference, 2018 Greater China Area Finance Conference, and 2018 Asian Finance Association Annual Meeting for helpful comments. Zhang acknowledges financial support from the National Natural Science Foundation of China (No. 71902115).

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