The Spillover Effect of Customer CEO Myopia on Supplier Firms

This paper shows that customer CEOs' short-term equity incentives impose a negative spillover effect on the real investment decisions of their supplier firms. Specifically, we find that CEOs' short-term incentives, measured by CEOs' vesting equity in a given quarter, are negatively associated with suppliers' investments in R&D expenditures in the same quarter. The reduction of suppliers' R&D is not fully explained by the decline in customers' own R&D or capital expenditures resulting from customer CEOs' short-term incentives. Furthermore, we find that customer CEOs' short-term incentives have a less pronounced effect on reducing suppliers' R&D investments when the customers have less bargaining power, are younger, are considered more trustworthy, or are monitored by blockholders. The effect is also less pronounced when the suppliers have higher capital redeployability. At last, we show that supplier firms also reduce their trade credit offering and inventory cost. Taken together, we argue that customer CEOs' myopic behavior, induced by their short-term incentives, reduces suppliers' incentive to commit to relationship-specific investments