Politically connected suppliers and firm financial stability

Abstract

While prior studies focus on the impact of a firm’s own political connections on its financial performance, this paper examines whether and how a firm’s financial stability is affected by the political connectivity of its key suppliers. Controlling for supplier-buyer relationship strength and the focal firm’s own political connections, empirical tests reveal that politically connected supplier industries significantly impair the financial performance of a focal firm. Furthermore, a firm’s financial stability is substantially eroded by the increases in political expenditures of its major supplier industry. These outcomes are more severe for focal firms with low market power and remain robust to using a combination of matched samples, dealing with possible selection bias. Further tests indicate that capital investments and business innovations are two potential channels through which politically connected suppliers destabilize the focal firm’s financial performance.