Contagion of corporate misconduct in the supply chain: Evidence from customers and suppliers in China

Abstract

Non-compliance with operational procedures can significantly disrupt the functioning of supply chains. This study examines the impact of corporate misconduct by both supplier and customer firms on the corporate misconduct of the focal firm within the supply chain. Utilizing data from 723 publicly listed companies in China, we employ a difference-in-differences approach for our analysis. The results indicate that misbehavior exhibited by both supplier and customer firms contributes to an increase in corporate misconduct by the focal firm. Based on the social contagion theory, we argue that supplier misconduct leads to an increase in focus firm misconduct through a mechanism similar to “spillover effect.” Customer misconduct leads to an increase in focus firm misconduct through a mechanism similar to the “learning effect”. And this phenomenon is influenced by the cooperation intensity and the industry sensitivity. The conclusion to our research makes some theoretical contributions. First, our research focuses on silent organizational factors in supply chain contagion, providing evidence of such factors spreading unobserved in the supply chain. Secondly, we explains the different mechanisms of transmission between suppliers and customers in the dissemination of misconduct across the supply chain. Finally, our research findings provide support for managing supply chain misconduct as well as supplier and customer collaboration.