Examining the Stock Price Effect of Corruption Risk in the Supply Chain

Abstract

Although corrupt practices in the supply chain are not rare, this topic seems neglected in the literature. This could potentially be because a supply chain focused framework is lacking, and therefore it is difficult to measure the true impact of such issues. Why, how, and how much does corruption damage the corresponding firm in the supply chain? Our study takes what we term a supply chain view of corruption, and then estimates the stock price effect of corruption from that point of view. We focus on kickbacks and bribery issues that may damage a target firm's reputation and its market value. In particular, we address firms’ corrupt practices from a sustainability risk perspective with the conceptualization of corruption risk (CR). Using an event study methodology, based on a sample of 315 CR cases in the United States, we find significant market penalties for allegations of the target firms’ CRs (triggers) and its subsequent issues (investigation, regulatory and resolution). However, the market penalties are largely driven by triggers, not by the subsequent issues. We further reveal that the stock market reacts more negatively to CRs that occur upstream with suppliers than downstream with customers. Therefore, target focal firms must be cautious with upstream–trigger CRs.

Modelling Sustainability Risk in the Brazilian Cosmetics Industry

“…[20] typifies economic or operational risks as follows: risks from suppliers, risks from internal company processes, risks from customer demand, and risks from factors associated with the corporation. The economic dimension of sustainability risk can be external to the chain-boycotts, energy price volatility, financial crisis and litigation risks external to the chains-or internal to the chain-antitrust claims, bribery and corruption, false allegations and dishonesty, patent infringement, pricing and tax evasion [10,11,13].…”

“…In Table 1, risks factors are also categorized by responses adopted by companies. Sustainability risks can trigger stakeholders' adverse reactions, resulting in image and reputation damage for customers, or even generating boycotts or cancellations [11,13]. Such harmful reactions can lead to supply chain interruption, so it is necessary to distinguish suppliers' sustainability risks from traditional risks as known in the supply chain literature.…”

“…Supply chains involve different environmental, social and ethical attributes [7,8]. There is evidence of financial consequences of companies' social, economic, and moral sustainability risk [9][10][11]. According to [6], the study of different actors in different geographic spaces is relevant to having a broader view of the challenges to sustainability.…”

“…Different countries and companies present sustainability risks, monitored through modern information and communication technology techniques [4][5][6][7][8][9][10][11][12] The risk assessment of external and internal factors of a supply chain is an important management component [13]. Risks are potential conditions or events in the supply that may trigger reactions that are harmful to companies' businesses [9,14].…”

“…However, the inadequate management of those events can have a negative impact on companies and damage reputation, which could increase financial losses due to changing consumer purchase intentions or even boycotts of the brand [10,11,18]. The consequences of scandals can cause companies to lose value [2,11,19]. Therefore, understanding the sustainability risks of the supply chain can help companies improve their resilience [20].…”