Stock Market Reaction to A Buyer’s Supply Chain Sustainability Management: An event study examining the consequence to buyers and their suppliers

Abstract

In response to increasing stakeholder pressure on firms to improve environmental and social performance, firms increasingly adopt supply chain sustainability management (SCSM) that place new requirements on their suppliers. This research explores how SCSM from a firm (i.e., a buyer) influence their own and their suppliers’ financial performance using objective measures. The difference in the magnitude of the impact of SCSM on these two levels of the supply chain is explored. Factors that influence the impact of SCSM on financial performance are investigated for both buyers and their suppliers, focusing on the nature of SCSM and firm-level characteristics.

Event study methodology was used to measure the financial performance of buyers and suppliers by estimating the abnormal stock returns in response to buyers’ SCSM announcements made between 1990 and 2016. In the buyer analysis, 308 announcements of buyers’ SCSM were used. In the supplier analysis, a ‘related firms’ design was used by matching the suppliers to their paired buyers, to give a sample of 2189 supplier observations derived from 219 buyers’ SCSM announcements. A cross-sectional regression analysis was used to test the effects of the factors on financial performance for each of the buyer and supplier observations in the samples. A paired sample t-test using the observations paired from the same announcements was used to investigate the different impact of SCSM on buyers and suppliers.

The impact of SCSM on both buyers’ and suppliers’ financial performance is statistically significant and negative and is more negative for suppliers. Three factors influence buyers’ financial performance change in response to SCSM adoption. Less negative financial performance was found when several buyers jointly develop and mandate SCSM on their suppliers using a ‘group SCSM’ approach or when they emphasize the social dimension of SCSM (e.g., labor rights). However, buyers with high growth prospects suffer more negative financial performance.

Five factors influence suppliers’ financial performance change in response to SCSM compliance. The suppliers that have a high level of buyers’ dependence and high inventory slack have less negative financial performance when they are required to comply with their buyers’ SCSM. However, group SCSM approach used by buyers and a long-term relationship with buyers increase suppliers’ negative financial performance. A high level of financial slack and dependence on buyers interactively create more negative financial performance.

There are two main research implications. While the impact of SCSM in a supply chain context (in dyadic relationships) suggests all parties are worse off, a buyer can shift the burden of SCSM to its suppliers as shown by the greater magnitude of negative financial performance for the supplier than the buyer. There are factors that both buyers and suppliers can consider and control to balance sustainability with financial performance through a buffer or benefit, when SCSM is being adopted.

The magnitude of the expected negative financial performance suggests challenges in SCSM adoption for managers, particularly the shift of risks and costs to suppliers. Managers may deal with business risks relating to SCSM based on the influential factors proposed by this research to buffer against the negative impacts. The negative financial performance over the supply chain suggests that the long-term prospects for SCSM are fragile. Policy implications include additional societal support (e.g., tax support) for the firms adopting SCSM.