The Disciplinary Role of Corporate Customers

Abstract

We examine whether economic links with major customers, an important group of strong stakeholders, act as a deterrent to corporate misconduct. We show that firms with a concentrated customer base are less likely to commit misconduct and pay lower penalties. These findings hold with numerous robustness checks and different attempts to mitigate endogeneity concerns. Consistent with a risk management motive of customers, we find that the negative effect of customer concentration on misconduct is more pronounced when perceived supplier misconduct risk is higher, and that firms with major customers do not engage in more corporate goodness. Exploring underlying economic mechanisms, we find that firms with major customers exhibit improved worker safety, more employee-friendly workplace practices, and less aggressive financial and investment policies. We also provide suggestive evidence that major customers discipline supplier misconduct through both external influence and internal control.