Customer political sentiment and supplier relationship-specific investments

Abstract

This study examines the relationship between customer political sentiment and supplier relationship-specific investments (RSIs). We expect a positive relationship, as favorable customer political sentiment signals optimistic future business conditions and stronger expected demand from customers, thereby encouraging suppliers to increase their specific investments. Using established measures of RSIs and political sentiment, we document a positive association between customer political sentiment and supplier RSIs. This result remains robust when we employ the entropy balancing method and apply customer CEO turnover as a plausibly exogenous shock. We further show that suppliers with lower bargaining power are more dependent on customer political sentiment for their investment decisions. Channel analysis indicates that the positive customer political sentiment predominantly affects supplier RSIs by fostering an optimistic outlook. Our cross-sectional analyses show that the positive association between customer political sentiment and supplier RSIs is more pronounced when suppliers face greater uncertainty and when customer information is less transparent. Overall, this study offers insights into the multifaceted dynamics of political sentiment, supply chain intricacies, and strategic investment decisions.