The Dark Side of Stakeholder Influence: The Surprising Effect of Customer Fraud on Suppliers

We show that influential stakeholders distort corporate policies when they cannot commit to a long-term relationship. Following the revelation of financial fraud by a major customer, suppliers surprisingly outperform a control group in terms of sales growth, Tobin’s Q and survival likelihood over a ten-year period. Our results suggest that, prior to the fraud revelation, managers’ short decision horizons and aversion to short-term risk or uncertainty enables influential customers to demand relationship-specific innovation when their bargaining power is stronger, leading to suboptimal diversification. When customer bargaining power weakens, suppliers engage in riskier and novel innovation, which diversifies the customer base.