Banerjee, Shantanu, Sudipto Dasgupta and Rui Shi: “ The Dark Side of Stakeholder Influence: The Surprising Effect of Customer Fraud on Suppliers”, CEPR Discussion Paper No. DP16701, R&R (second round) at Review of Corporate Financial Studies.
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.
Boamah, Evans Ofosu and Shantanu Banerjee: “The Beguiling Behaviour of Narcissistic CEOs: Evidence from Repurchase Announcements”, R&R (second round) at Journal of Business Finance and Accounting.
We study whether CEO narcissism affects a firm’s share repurchase announcements and their implementations. Using signature characteristics as a measure of narcissism, we find that US firms with narcissist CEOs are more likely to make repurchase announcements and announce higher repurchase dollar amounts. However, these firms are less likely to follow through. They repurchase less and a small dollar amount when they make an actual repurchase in the announcement year. The higher rate and amount of repurchase announcements are more pronounced in poorly-governed firms with narcissistic CEOs. These results are robust to various specifications including a difference-in-difference specification using CEOs’ exogenous turnover, controlling for other CEO traits and using an alternative measure of narcissism based on pronoun usage in CEO communications. Collectively, the results presented in this study demonstrate that narcissist CEOs play a critical role in the intensity of share repurchase announcements and their executions, particularly for firms with weaker governance structure.
Banerjee, Shantanu, Xin Chang, Kang Kang Fu, Li Tao and George Wong: “Environmental risk and buyer-supplier relationships”
We provide empirical evidence on the adverse effects of supplier firms’ environmental risk exposures on their relationships with principal customers. We document that supplier firms with high environmental risk are less likely to have principal customers. Moreover, from the principal customers’ perspective, a higher level of environmental risk lowers a supplier firm’s probability of being selected relative to its industry peers by its potential customer. Conditional on an ongoing relationship with principal customers, supplier firms with high environmental risk have lower sales to principal customers and shorter relationship durations. These results are more pronounced when customers’ environmental risk is lower. Collectively, our findings suggest that improving the trading relationship with principal customers is an important channel through which firms can benefit economically from being environmentally responsible.
Banerjee, Shantanu, Sudipto Dasgupta, Rui Shi and Jiali Yan: “Predatory Advertising, Financial Fraud, and Leverage”
We examine how an industry leader’s competitors respond when financial fraud by the leader is publicly revealed. We document evidence of predatory advertising – close competitors of the leader step up advertisement spending relative to control firms. Although we do not directly observe product prices, we find that profit margins drop, consistent with predatory pricing. These effects are stronger when the fraud firm has higher leverage, and when the average leverage of rival firms is lower. The effects appear mainly in industries that produce customized products and consumer switching costs are high. Increasing advertising expenditure appears to be a more potent predatory strategy in industries that experience new customer growth, whereas cutting prices appears more potent in industries with stagnant customer base.
Banerjee, Shantanu and Arijit Mukherjee: “Protecting Consumers through Patent Protection: The Implications of Merger”
We challenge the common wisdom that patent protection in the South always makes Southern consumers worse off by reducing product market competition unless it increases innovation significantly. We show that the absence of patent protection may affect the consumers in the South adversely by encouraging cross-border horizontal merger, thus increasing product market concentration compared to the situation with patent protection. Hence, we provide a new rationale for patent protection, which has been overlooked in the literature, by showing that, even if we ignore the innovation inducing effect of patent protection, patent protection may have a positive impact on the consumers by creating higher product market competition.