Customers’ Social Capital and Suppliers’ Profitability

Abstract

We empirically examine the effect of customers’ social capital on the financial performance of suppliers. Social capital, as captured by the strength of secular norms and the density of social networks in local geographical regions, reflects social influences surrounding corporate headquarters. Because customers’ social capital could constrain their opportunistic behaviors and improve supply chain collaboration through its influence on managers’ moral values and external monitoring, we hypothesize and find a positive association between customer social capital and supplier profitability. The association is more pronounced when customers reside closer to suppliers, have more short-horizon incentives, and possess stronger bargaining power. Collectively, our findings suggest that social capital arising from institutions in local areas may mitigate customer opportunism and highlight its real effects that spill over to suppliers’ operational performance.