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An Empirical Analysis of the Effect of Supply Chain Disruptions on Long‐Run Stock Price Performance and Equity Risk of the Firm
Abstract
This paper investigates the long-term stock price effects and equity risk effects of supply chain disruptions based on a sample of 827 disruption announcements made during 1989–2000. Stock price effects are examined starting one year before through two years after the disruption announcement date. Over this time period the average abnormal stock returns of firms that experienced disruptions is nearly –40%. Much of this underperformance is observed in the year before the announcement, the day of the announcement, and the year after the announcement. Furthermore, the evidence indicates that firms do not quickly recover from the negative effects of disruptions. The equity risk of the firm also increases significantly around the announcement date. The equity risk in the year after the announcement is 13.50% higher when compared to the equity risk in the year before the announcement.
... Previous research has extensively documented the adverse effects of supply chain shocks on firm performance, operational efficiency, and financial health (e.g., Hendricks & Singhal, 2003;Hendricks & Singhal, 2005a). Hendricks and Singhal (2005b) show that a supply chain disruption increase equity risk correspond with a decline of equity market value. Hamada (1972) showed the interconnectedness of equity risk with asset risk and financial leverage. ...
... Hamada (1972) showed the interconnectedness of equity risk with asset risk and financial leverage. Hendricks and Singhal (2005b) further show that in the presence of constant debt levels within a firm's capital structure during a disruption, the financial leverage (debt-equity ratio) is likely to rise, leading to an increase in equity risk. Hendricks and Singhal (2005a) show that supply chain disruptions adversely affect the financial conditions of the firm (lower revenue and operating income) with higher total inventory and an increase in costs. ...
... We estimate a linear and non-linear LP model. The rationale for estimating a non-linear model is based on Hendricks and Singhal (2005b), who posit that " [d]isruptions have a negative impact on equity prices and the market value of the equity. Therefore, if a firm has debt in its capital structure and the level of debt is kept constant, disruption should increase the financial leverage … of the firm, resulting in an increase in the equity risk" (p. ...
This study investigates the impact of supply shocks on financial leverage (debt-equity ratio) in the U.S. economy from 1998:Q1 to 2024:Q2. The study employs a linear and non-linear Local Projections (LP) and Bayesian Vector Autoregression (BVAR) models to explore dynamic relationships. While the LP models reveal that a supply chain shock negatively affects leverage with statistically significant results, there is no evidence of state dependence. The BVAR model suggest that a supply chain shock is disruptive via reduction (an increase) in output (inflation), accompanied by lower leverage.
... Supply chain risk thus refers to possible future events with a measurable uncertainty that are characterized by their likelihood of occurrence and impact on a focal firm's and potentially also on supply chain partners' (Hendricks et al., 2009) performance objectives, including profit, operating income, return on sales, firm value, product quality, and customer satisfaction (Knight, 1921;Hendricks & Singhal, 2005a;Craighead et al., 2007;Tang & Musa, 2011;Heckmann et al., 2015). It can also impact stock price performance (Hendricks & Singhal, 2005b). In essence, supply chain risk spawns significant financial, operational, and relational costs, either for systematically managing the risk or for recovering from it (Blackhurst et al., 2005;Hendricks & Singhal, 2005b;Wagner & Bode, 2008;Ponomarov & Holcomb, 2009;Speier et al., 2011;Sodhi et al., 2012). ...
... It can also impact stock price performance (Hendricks & Singhal, 2005b). In essence, supply chain risk spawns significant financial, operational, and relational costs, either for systematically managing the risk or for recovering from it (Blackhurst et al., 2005;Hendricks & Singhal, 2005b;Wagner & Bode, 2008;Ponomarov & Holcomb, 2009;Speier et al., 2011;Sodhi et al., 2012). ...
... Considering the features of a supply chain design that augment a firm's vulnerability to supply chain risk, SCRM scholarship has referred to customer dependence (e.g., Hallikas et al., 2005), supplier dependence (e.g., Jüttner, 2005), supplier concentration (e.g., Tang, 2006b), single sourcing (e.g., Hendricks & Singhal, 2005b), density, complexity, and node criticality (Craighead et al., 2007), horizontal, vertical, and spatial complexity (Bode & Wagner, 2015), as well as global sourcing (e.g., Peck, 2006). Further, the level of vulnerability also depends on the sources of disturbance (i.e., direct vs. indirect sources) and categories of disturbance (i.e., quantitative and qualitative) (Svensson, 2000). ...
Purpose: This study aims to shape the future trajectory of scholarly research on traditional, reputational and societal supply chain risks and their management.
Design/methodology/approach: The research employs a narrative literature review of the overview type. In order to control bias stemming from the subjectivity of our methodology, we synthesized the relevant literature transparently and established various safeguarding procedures.
Findings: The established research stream on traditional supply chain risk has generated a wealth of concepts that can potentially be transferred to the study of reputational and societal risks. The maturing research stream on reputational risks has mostly focused on risk manifestation, from the upstream perspective of the focal firm. The emerging scholarship on societal supply chain risks has anecdotally highlighted detrimental effects on contextual actors, such as society-at-large.
Research limitations/implications: The study shifts scholarly attention to the role of the context in the risk manifestation process-as a potential risk source for traditional supply chain risk, during the risk materialization for reputational supply chain risk, and as the locus of the risk effect for societal supply chain risk.
Originality: This review is unique in that it fosters a holistic understanding of supply chain risk and underscores the increased importance of the context for it. The socioeconomic , institutional and ecological contexts connect the three reviewed research streams. Detailed research agendas for each literature stream are developed, comprising 23 topical areas in total.
... Additionally, technological advancements, while enhancing efficiency, have also introduced new risks. Companies that rely heavily on global outsourcing, single sourcing, and just-in-time inventory strategies have found their supply chains increasingly fragile, lacking the flexibility needed to adapt to unexpected disruptions [101][102][103][104][105]. ...
... While traditional risk management approaches focus on identifying and mitigating risks, Supply Chain Resilience [SCRES] goes a step further, emphasizing the ability of supply chains to not only withstand but also recover from disruptions and maintain operational continuity [24,125]. Supply chains are exposed to a multitude of risks, including natural disasters, geopolitical tensions, cyberattacks, and pandemics each with the potential to cause severe disruptions to the flow of goods and services [104,117]. ...
Mitigating Supply Chain Vulnerabilities: A Bibliometric Analysis of Sustainable Logistics for Resilience and Risk Management with Perspectives on the Automotive Industry
... It has the potential to cause physical damage, threaten production and distribution, damage sales, reduce company revenue, cut into market share, inflate costs, and cause budget overruns. Disruptions also can damage company credibility with investors, resulting in a devastating impact on shareholder value and driving up the cost of capital (Hendricks & Singhal, 2005). Supply chain disruption is likely to have a long-term impact on supply chain performance. ...
... This is because supply chain disruption has the potential to cause physical damage, threaten production and distribution, damage sales, reduce company revenue, cut into market share, inflate costs, and cause budget overruns (Revilla & Saenz, 2017). Disruptions also can damage company credibility with investors, resulting in a devastating impact on shareholder value and driving up the cost of capital (Hendricks and Singhal, 2005). According to Bode and Macdonald (2017), it can have severe negative consequences on firm performance at multiple levels as well as on customers and suppliers. ...
My thesis was about the problems on supply chain performance faced by trading companies in Mogadishu Somalia. The study used supply chain disruptions and inventory management as dependent variables to predict supply chain performance among trading companies.
... In February 2020, China was the first country to shut down factories to prevent the spread of the virus, hampering global supply chains, particularly for firms relying on Chinese suppliers (Haren & Simchi-Levi, 2020;Meier & Pinto, 2020;The Economist, 2020). As the pandemic progressed, supply chain disruptions became more severe and widespread (Helper & Soltas, 2021), which potentially had devastating financial consequences for firms (Hendricks & Singhal, 2003, 2005a, 2005b. The distinct nature of supply chain disruptions during the Covid-19 pandemic sets it apart from previous crises, prompting research on corporate resilience in the context of this global pandemic. ...
... Supply chain disruptions can be very costly for firms that are unprotected. Hendricks and Singhal (2003, 2005a, 2005b) document a significant deterioration in financial and operating performance and a lasting increase in the cost of capital for firms that experience supply chain disruption events. One strategy to hedge supply risk is to hold higher inventory levels as a buffer. ...
We study the role of inventory in corporate resilience to Covid‐19 in 2020, which triggered exogenous shocks to consumer demand, commodity prices and supply chains. Unexpected drops in consumer demand and commodity prices increase the costs of inventory. Conversely, inventory holdings can buffer against supply disruptions. Empirically, US firms with higher inventory experienced more negative stock market responses early in the crisis due to falling consumer demand. However, since May 2020, inventory has become valuable as a hedge against supply disruptions, improving firm performance. During Covid‐19, unlike other crises, inventory played a unique role as a hedge against supply disruptions.
... Given their negative impact on firm performance, it is not surprising that investors react to news about disruptions by immediately sending stock prices down by over 10 percent on average (Hendricks and Singhal, 2003). Congruent with the idea that supply chain disruptions increase both operational and financial uncertainty, investors' initial reaction is often incomplete, as disruption announcements are typically followed by negative long-run abnormal returns and increased business risk (Hendricks and Singhal, 2005b). ...
... Supply chain activities of all types can present a significant amount of uncertainty, and supply chain disruptions often negatively impact firm operating performance (Hendricks and Singhal, 2005a;Baghersad and Zobel, 2021). This has consequences for firm value, as both short-run (Hendricks and Singhal, 2003) and long-run (Hendricks and Singhal, 2005b) abnormal returns are significantly negative following supply chain disruptions. We provide important practical and theoretical implications in this work. ...
... This outsourcing strategy allows manufacturers to focus their resources on core competencies, achieve cost savings, access partners' knowledge and technology and improve market responsiveness and coverage (Afum et al., 2021;Deng and Xu, 2023;Dyer and Singh, 1998;Negi, 2024). However, under this strategy, manufacturers have become more vulnerable to supply chain risks that can potentially disrupt the flow of materials, information and products across the supply chain (Hendricks and Singhal, 2005), negatively affecting their operations. Moreover, these risks are on the rise with the more globalised, large, complex and extended supply chains nowadays (Ali et al., 2021;Fern andez Campos et al., 2022;Wicaksana et al., 2022). ...
... As such, supply risk can generate a cascading disruption spanning across the supply chain, affecting the performance of all its interdependent actors (Ali and Gurd, 2020). In fact, supply chain disruptions can reduce firm's stock return by 33-40% (Hendricks and Singhal, 2005). Therefore, addressing supply risk is a crucial part of managing overall supply chain risk (Sharma et al., 2024;Wu et al., 2006). ...
Purpose
This study examines the impact of inter-organisational justice (i.e. distributive, procedural and interactional) in the buyer–supplier relationship on supply risk and, in turn, on a firm’s marketing and financial performance.
Design/methodology/approach
A structured survey was administered both online and in-person to Jordan-based manufacturing companies. The 137 responses received were analysed using partial least structural equation modelling.
Findings
The study found that while establishing both procedural and interactional justice in the relationship has a negative impact on supply risk, promoting distributive justice, surprisingly, has no impact. Moreover, supply risk was found to be detrimental to the firm’s marketing and financial performance.
Research limitations/implications
This study considers only the direct role of inter-organisational justice in reducing supply risk. Future research could enhance our understanding of this role by exploring the underlying mechanisms and conditions that could govern it.
Practical implications
Managers can alleviate supply risk by ensuring procedural and interactional justice in the relationship through involving suppliers in the decision-making processes, consistently adhering to established procedures and communicating transparent and ample information.
Social implications
Addressing supply risk can help in maintaining community resilience and economic stability.
Originality/value
The study highlights inter-organisational justice as a new approach to mitigating supply risk. Moreover, by examining how supply risk can affect a firm’s marketing performance, it also highlights a new implication of supply risk. Furthermore, by exclusively examining the impact of supply risk on a firm’s financial performance, the study provides a more nuanced interpretation of the effect of supply risk and how it can be reduced.
... A closely related but softer part of connectivity concerns relational contracts. In the face of potential disruptions, which can be very costly (Hendricks and Singhal 2003, 2005a, 2005b, firms invest in relationships. These investments include favors such as ordering in advance to assist a supplier during a period of low demand (Uzzi 1997) and the allocation of scarce supply to a customer in need (Carlton 1978). ...
... Increased bureaucracy and changes in rules and regulations have made it difficult for many UK firms to deal with their EU counterparts (British Chambers of Commerce 2021). Similarly, an aggregate logistical 6. Hendricks and Singhal (2003, 2005a, 2005b show that localized disruptions are often associated with durable declines in sales growth and stock returns. ...
Supply chain problems, previously relegated to specialized journals, now appear in G7 Leaders' Communiqués. Our paper looks at three core elements of the problems: measurement of the links that expose supply chains to disruptions, the nature of the shocks that cause the disruptions, and the criteria for policy to mitigate the impact of disruptions. Utilizing global input-output data, we show that the US exposure to foreign suppliers, and particularly to China, is "hidden" in the sense that it is much larger than what conventional trade data suggest. However, at the macro level, exposure remains relatively modest, given that over 80 percent of US industrial inputs are sourced domestically. We argue that many recent shocks to supply chains have been systemic rather than idiosyncratic. Moreover, systemic shocks are likely to arise from climate change, geoeconomic tensions, and digital disruptions. Our principal conclusion is that the concerns regarding supply chain disruptions, and policies to address them, should focus on individual products rather than the whole manufacturing sector.
... Disruptions in the supply chain environment can be consequential for different markets i.e., commodity, industrial and renewable energy market as its dynamics are multifaceted and has potential implications for policymakers and investment strategists (Gozgor et al., 2023;Hendricks & Singhal, 2005;Hu et al., 2024;Li et al., 2023;Ren et al., 2024;Zhong et al., 2024). Since the GSCPI measures the global supply chain disruptions by capturing variations in transportation cost, backlogs, delivery times and stock levels, therefore an increase in GSCPI can lead to increased costs and delays in production. ...
Geopolitical tensions, port congestions and pandemic have prompted unprecedented supply chain disruptions in the recent times. China’s pivotal role as a global manufacturing and trading hub makes it susceptible to these disruptions. In this backdrop, the following study investigates the relationship between global supply chain disruptions across sectors of the Chinese stock market by employing quantile-on-quantile regression. Our results reveal a predominant negative relationship for most of the sectors. Moreover, pronounced negative effects are observed for utilities and telecom sector. Lower quantiles of GSCP have strong negative (positive) influence when the market is bearish (bullish) across sectors, except for financial sector.
... The regular operations of supply chains are adversely affected by these disruptions or hazards. Given that supply chain interruptions may have serious, prolonged negative effects on the economy (Hendricks and Singhal, 2005). Several firms have established emergency agencies in reaction to disruptions (Azadegan et al., 2020) in order to handle crises, minimize environmental uncertainty and ensure the sustainability of life and production. ...
This study examines the relationships between lean manufacturing, green supply chain management (GSCM), supply chain resilience (SCR), and firm performance in Thai manufacturing companies. Using data from 322 employees across various industries, the research employs co-variance-based structural equation modelling to test a series of hypotheses. The findings reveal that lean manufacturing has significant positive effects on both GSCM practices and firm performance. GSCM practices demonstrate a strong positive impact on SCR. However, contrary to expectations, the study finds no significant direct relationship between GSCM practices and firm performance, nor between SCR and firm performance. The hypothesized mediating roles of GSCM practices and SCR in the relationship between lean manufacturing and firm performance are not supported. These results suggest that while lean manufacturing and GSCM practices contribute to improved operational efficiency and environmental sustainability, their translation into enhanced financial performance may be more complex than previously thought. The study contributes to existing literature by providing empirical evidence from the Thai manufacturing context and highlights the need for further research into how operational improvements in lean and green practices can be converted into tangible financial outcomes.
... Both natural disasters (e.g., earthquakes, floods) and human-induced events (e.g., strikes, terrorist attacks) can all lead to supply chain interruptions, which in turn have profound impacts on business operations [2]. These disruptions not only affect production and delivery but can also trigger a chain reaction, resulting in financial losses, damage to reputation, and loss of market share [3]. ...
This study focuses on building resilience in electric vehicle (EV) supply chain to address the growing challenges of global market uncertainties. Grounded in dynamic capabilities theory, the study identifies and categorizes 16 key factors influencing Supply Chain Resilience (SCR) through a review of 117 academic papers and data analysis from 8 supply chain experts and 374 EV supply chain enterprises. These factors are grouped into four dynamic capability sets: sensing capability, external resource integration capability, internal resource integration capability, and transforming capability. The Structural Equation Modeling (SEM) was used to validate the impact paths of these four dynamic capabilities on SCR, revealing that external resource integration capability has the most significant positive effect on SCR, followed by internal resource integration and sensing capabilities, while the impact of transforming capability is relatively weaker. The findings suggest that EV companies should prioritize strengthening both external and internal resource integration to enhance SCR. This research provides a theoretical foundations and practical guidance for EV companies to improve SCR in a complex global environment, offering new perspectives and empirical support for future studies in supply chain management.
... For instance, Lee et al. illustrated how small, sudden changes amplify throughout supply chains [26]. Empirical studies confirm the negative effects of these sudden changes on firms' operational efficiency [27]. Craighead et al. argue that the intensity of sudden changes in supply chains depends on inherent adaptabilityresilience-and deliberate mitigation capabilities [22]. ...
The aim of this study is to provide a causal model of industrial resilience using thematic analysis and interpretive structural modeling in the automotive parts manufacturing industry. The research approach is applied, and in terms of nature and method, it is descriptive-analytical and survey-based, falling under the category of mixed methods research (initially qualitative, followed by quantitative). Data and information were collected through a review of library and documentary sources and field observations (interviews and questionnaires). Quantitative models and software were employed for data analysis. Additionally, through thematic analysis and expert interviews, key drivers influencing industrial resilience were identified and selected. Based on the research findings, the overall pattern of industrial resilience drivers in the automotive parts manufacturing industry reflects an unstable environmental system, demonstrating an intermediate state of influence and susceptibility. To identify the relationships between variables and network resilience, the combined DEMATEL-ISM technique was utilized. The study's findings indicate 32 dimensions for designing the industrial resilience model. The results of interpretive structural modeling reveal that the factors of multiple suppliers and contractors, employee training, and knowledge transfer are the most influential components of the resilience model. Conversely, components such as facilitating inter-company collaboration, activities related to sales promotion, networking and cooperation with competitors, institutions, and research and knowledge-based organizations, product marketing and promotion, customer communication, and feedback reception are the most impacted components of the resilience model in the automotive parts manufacturing industry.
... Over the past decade, the resilience of organizations and their supply chains has garnered substantial interest from both practitioners and scholars (for a comprehensive review, see Tukamuhabwa et al., 2015). This heightened interest is driven by the profound impacts that disruptions can have at the firm level and beyond, affecting both short-term and long-term operational and financial performance (Hendricks, Singhal, 2005). ...
Purpose: The aim of this article is to introduce the concept of investigating disturbances in the flow of materials for production and to select methods that can be used to identify, measure and evaluate disturbances that occur in the material logistics of companies. Design/methodology/approach: This paper proposes a self-developed methodology for identifying, measuring and analysing disruptions in material flows to the production process based on cause-and-effect analysis. Findings: The result of the research undertaken in this article is to present the application of the developed methodology for the identification and analysis of disruptions in the material logistics of a paint and plastering compound company. Practical implications: The developed methodology provides a versatile tool for identifying and analysing disruptions to material flows in the production process and can be applied to manufacturing companies in various industries. Originality/value: This article contains the results of the measurement and analysis of disruptions occurring in the material flows of a company specialising in the production of paints and plastering compounds, for which an in-house methodology based on cause-effect analysis was proposed. This resulted in the identification of disruptions in material flows, but also in the identification of the source of their occurrence and where they manifest themselves in the value added chain.
... In general, supply disruption can significantly impact the business performance of downstream enterprises, causing significant damage to their profitability and leading to shareholder's profit loss and a decline in corporate reputation [2]. Faced the frequent occurrence of supply disruption events and their serious consequences (exemplified by the 2011 Japanese earthquake, which forced many auto parts suppliers to stop production, resulting in Honda, Toyota and other automakers suspending operations for half a year), an increasing number of firms seek solutions. ...
We study the optimal licensing strategy amid the risk of supply chain disruption. Specifically, where an upstream supplier (Licensor, patent-holding firm) licenses technology to another firm (Licensee), so a downstream manufacturer (M) can adopt a dual source purchasing strategy to ensure supply reliability, especially, the estimates of supply reliability among suppliers and manufacturers are inconsistent. Licensor has two licensing strategies: royalty licensing and fixed-fee licensing. Our findings reveal that Licensor will decide which licensing strategy to adopt, considering the fixed fee. In most case, Licensor will decide whether to produce after technology licensing based on estimation conditions, but in case of M and Licensee estimate inconsistently, Licensor will always produce after royalty licensing. Additionally, manufacture will take different procurement strategies based on different estimation situations, especially the estimation of Licensor.
... Tomlin [5] presented mitigation and contingency strategies, emphasizing that multi-sourcing approaches are more effective in managing correlated risks. Hendricks and Singhal [6] demonstrated that firms experiencing supply chain disruptions face significant financial consequences, thereby reinforcing the need for effective risk mitigation strategies like diversified sourcing. ...
The complexity of modern supply chains exposes manufacturing firms to significant risks, which can result in supply chain disruptions. To mitigate these risks, diversified sourcing strategies have been adopted. This study develops a diversified sourcing strategy using a two-level supply network. Results indicate that manufacturing flexibility and reduced lead times are critical for designing resilient sourcing strategies. The study presents key benefits of diversified sourcing in enhancing system resilience and mitigating risks associated with single-vendor sourcing, drawing on empirical data and simulation models. In addition, the study includes a survey of sizable manufacturing plants in the major geographies. This work highlights successful implementation strategies, case studies, and future trends in diversified sourcing.
... In theoretical models, these linkages propagate changes in productivity [16,17,18,19], disruptions [20], and bankruptcies [21,22,23,24,25,26]. Empirical research on industrialised economies finds that supply-chain disruptions often lead to lower stock prices and sales growth [27,28,29,30]. These disruptions, and the uncertainty that they entail, affect development: they cause firms to use less capital [20], to misallocate inputs [17,18], or to form shorter supply chains [25], generally hindering the economy to industrialise [16] and limiting the effectiveness of policy [31,Chapter 4]. ...
Poor economies not only produce less; they typically produce things that involve fewer inputs and fewer intermediate steps. Yet the supply chains of poor countries face more frequent disruptions---delivery failures, faulty parts, delays, power outages, theft, government failures---that systematically thwart the production process. To understand how these disruptions affect economic development, we model an evolving input--output network in which disruptions spread contagiously among optimizing agents. The key finding is that a poverty trap can emerge: agents adapt to frequent disruptions by producing simpler, less valuable goods, yet disruptions persist. Growing out of poverty requires that agents invest in buffers to disruptions. These buffers rise and then fall as the economy produces more complex goods, a prediction consistent with global patterns of input inventories. Large jumps in economic complexity can backfire. This result suggests why "big push" policies can fail, and it underscores the importance of reliability and of gradual increases in technological complexity.
... Such disruptions are either due to natural causes (e.g., hurricanes, tsunamis, earthquakes, etc.), accidents (e.g., fires, spillage, unplanned contamination, etc.), or effectuated by criminal agents (e.g., counterfeits, thefts, cyberattacks, etc.). Supply chain disruptions, whether natural, accidental, or criminal, can also significantly impact a firm's financial and brand values (Hendricks & Singhal, 2005;Kleindorfer & Saad, 2005). ...
Supply-chain disruptions have numerous causes, including criminal actions, as well as natural disasters and human errors. The complexity of modern supply chains makes it challenging to detect, mitigate, or resolve disruptions. This paper presents an integrated framework for modeling pharmaceutical supply chains (PSCs), incorporating disruptions and mitigations. Based on extensive discussions with supply chain SMEs (subject matter experts) and federal government security officials, this framework unfolds in two steps: (1) a mapping process constructs a supply chain map from a focal firm’s perspective, and (2) the supply chain map is overlaid with various types of disruptions that can occur at supply chain locations. To this end, the paper systematically classifies PSC disruptions based on historical data and expert opinion. The paper discusses various pre-disruption and post-disruption mitigations and reports gleaned insights into their efficacy. Finally, the paper discusses the generalizability of this integrated framework to other supply chains, such as medical devices and satellite solar panels.
... • Collaborative product design • Collaborative research and innovation processes • Optimisation of logistical measures by avoiding empty trips and coordinating transportation routes over multiple tiers • Collaborative risk assessments • ... Hendricks and Singhal (2005), Huma, Ahmed, and Najmi (2020), Kilubi (2016), Lavastre, Gunasekaran, and Spalanzani (2012), Raj et al. (2022), Rajesh, Ravi, and Rao (2015) and Venegas Vallejos, Matopoulos, and Greasley (2022) Partnership, multiple sourcing and flexible contracts Strong partnerships between supply chain actors and the possibility to switch between suppliers. ...
... This research gap is concerning, as supply chain disruptions can have far-reaching consequences. For instance, a study by Hendricks and Singhal (2005) found that supply chain disruptions can lead to a 33%-40% lower stock return for affected companies relative to their industry peers. ...
The study examined the mediating role of supply chain security performance on the relationship between supply chain security practices and supply chain disruptions occurrences in the manufacturing industry in Ghana. Drawing on a survey of 336 manufacturing firms, dynamic capability, and contingency theories were applied using structural equation modeling (SEM) to test the conceptual model. It was discovered that both direct and indirect hypotheses supported the findings of the study. The results indicate that Ghanaian manufacturing firms have made progress in implementing supply chain security measures. The findings revealed that the adoption of comprehensive supply chain security practices is positively associated with improved performance metrics, including reduced inventory losses and damages, faster order fulfillment and delivery times, lower costs related to security incidents, and enhanced brand reputation and customer trust. Policymakers can leverage these insights to develop support programs aimed at strengthening the security capabilities of manufacturing firms, ensuring they are equipped to compete effectively in both local and global markets, improving security performance, and reducing the likelihood and impact of supply chain disruptions. In the quest of bridging the gap between theory and practice, this research contributes valuable knowledge to the discourse on supply chain security in developing countries, offering a roadmap for enhancing resilience and performance in the manufacturing sector.
... Supply disruptions may decrease performance related to operations (e.g. stockouts, production shutdowns), finance (lost sales, premium freight charges), and relationships (Hendricks and Singhal 2005;Wu, Blackhurst, and O'Grady 2007;Hendricks, Singhal, and Zhang 2009;Bode and Macdonald 2017). Yet, as illustrated by many empirical incidents, disruptions or failures of firms and establishments -e.g. ...
... Tujuan utama dari SCRM adalah mengurangi kemungkinan terjadinya situasi yang tidak pasti dan mendapatkan serangkaian solusi yang tepat untuk mengelola situasi secara efisien dan efektif (Shahbaz et al., 2017). Risiko terganggunya suatu rantai pasok dideteksi berdasarkan ketidakmampuan perusahaan dalam memenuhi permintaan melalui pasokan yang akan berdampak pada perusahaan (Hendricks & Singhal, 2009). Perusahaan perlu memiliki manajemen risiko yang baik agar dapat bertahan dalam persaingan yang semakin ketat. ...
Darah merupakan salah satu komponen penting bagi tubuh dan berperan dalam kelangsungan hidup manusia. Bank darah rumah sakit (BDRS) bertanggung jawab atas ketersediaan dan keamanan darah di suatu wilayah tertentu. Risiko-risiko yang terjadi pada rantai pasok darah di BDRS perlu mendapatkan perhatian penuh khususnya apabila terjadi wabah atau bencana agar aktivitas dan arus informasi, produk, dan uang dapat berjalan dengan lancar. Tujuan dari penelitian ini adalah membuat desain mitigasi risiko rantai pasok darah. Penelitian ini menggunakan studi kasus pada sebuah BDRS di Kota Bandung dan produk yang diamati adalah sel darah merah kemasan. Pendekatan baru yang digunakan dalam penelitian ini dimulai dengan pengumpulan mengenai risiko-risiko yang dapat terjadi dengan mendefinisikan dan mengklasifikasikan dalam model supply chain operation reference (SCOR). Setelah itu dilakukan penyebaran kuesioner sebagai input untuk menghitung bobot menggunakan analytical hierarchy process (AHP). Langkah berikutnya adalah mencari akar penyebab risiko menggunakan fault tree analysis (FTA) dan melakukan analisis untuk mencari penyebab risiko yang paling berpengaruh menggunakan failure mode effect and analysis (FMEA). Langkah akhir adalah merancang mitigasi risiko rantai pasok darah. Melalui penelitian ini diharapkan BDRS di suatu wilayah dapat mengetahui risiko yang perlu mendapatkan prioritas penanganan dan juga strategi yang dapat dilakukan agar risiko minimum. Berdasarkan hasil AHP, risiko yang memiliki bobot tertinggi sebesar 0,173 adalah tidak tersedianya stok darah di Palang Merah Indonesia (PMI) yang disebabkan oleh berkurangnya pendonor. Penyebab risiko ini dapat diatasi dengan menambahkan kegiatan donor darah di instansi dan BDRS. Pendekatan baru yang digunakan dalam penelitian dapat memetakan risiko rantai pasok darah lebih rinci.
... For instance, Hendricks and Singhal (2003) demonstrate that supply chain disruptions, such as production or shipping delays, can significantly reduce shareholder value. Hendricks and Singhal (2005b) show that such disruptions increase equity risk and lead to a decline in market value, while Hendricks and Singhal (2005a) find that supply chain issues negatively impact a firm's financial health by lowering revenue and operating income, increasing costs, and raising total inventory levels. Notably, affected firms may take up to two years to fully recover from the financial damage. ...
The COVID-19 pandemic and its aftermath exposed the vulnerabilities of global supply chains, leading to widespread delays and shortages that highlighted the interconnectedness of economies. This paper examines the global impact of supply chain disruptions on economic conditions, drawing on literature related to economic uncertainty, global economic integration, and the global supply chain disruptions. Using a Bayesian Vector Autoregression (BVAR) model, we analyze the effect of supply chain shocks. The empirical findings reveal that these disruptions significantly influence global economic stability, particularly through their impact on aggregate inflation and the policy responses that accompanies them.
... According to Hendricks et al. (2008), firms that prepare for their risks beforehand incur fewer losses. Moreover, according to Hendricks and Singhal (2005), Businesses do not immediately recover from the detrimental consequences of vulnerabilities. However, according to Hendricks et al. (2008), prepared businesses are less affected by disruptions. ...
Because of the existing risks, studying the maritime supply chain (MSC) is a complicated task. The interdependence of the global Supply Chain (SC) on other channel members makes it vulnerable to disruption. This research signifies the determinants such as improved Information and Communication Technology (ICT), Strategic Alliance (SA), and its effect on SC customer value within the context of the pharma industry. A structured questionnaire based on a five-point Likert scale was used to obtain responses from 98 participants. PLS-SEM was deployed as a research technique to evaluate the proposed research model. The findings indicate that the determinants such as sophisticated ICT and SA possess a considerable beneficial effect on SC resilience, which further affects MSC customer value substantially. The findings provide practitioners with useful implications to cope with uncertainties, increasing pharmaceutical SC customer value and benefiting patients and hospital pharmacies by facilitating on-time delivery of prescriptions and drugs.
... increasing) accordingly in response to the new event. The difference between the actual return due to the event and the expected return is called abnormal returns (AR), which reflects the weakening (enhancing) effect of event characteristics on a company's stock market value (Hendricks and Singhal 2005). We analysed the short-term performance of SCCSM by estimating the change of stock market value to SCCSM announcements, instead of the long-term performance of SCCSM. ...
... Disruptions caused by natural or human-made disasters affect supply chains in different aspects including transportation delays, labor unavailability, and supply-side shortage. A supply chain disruption announcement decreases a firm's stock returns by 20% on average after six months (Hendricks and Singhal, 2005). Various examples demonstrate the challenges the firms face when trying to recover from a disruption: six months after Japan's tsunami in 2011, Toyota faced disruption in its supply network, and due to a shortage of parts, idled some of its plants in North America (Kim et al., 2015). ...
Supply chain disruptions, notably exemplified by the COVID-19 pandemic, have substantial impacts, requiring effective resilience strategies. This study introduces a comprehensive multi-stage, multi-period green supply chain design model, incorporating six resilience strategies to tackle downstream and upstream disruptions. A rigorous two-stage stochastic optimization approach is employed to manage parameter uncertainties and disruptions. The objectives include minimizing disruption costs and CO 2 emissions, for a chain that operates under cap-and-trade emission regulation. The findings, derived from a numerical experiment and sensitivity analysis, offer the optimal supply chain structure and effective resilience strategies to mitigate disruptions. The demand structure for essential and non-essential products during disruptions are explored, emphasizing proac-tive resource allocation. In particular, the impact of facility capacity reductions underscores the importance of capacity management. Sensitivity analyses reflect the trade-offs involved in capacity management strategies, emphasizing the critical need to maintain an optimal level of capacity to prevent service level degradation. Additionally, examination of carbon abatement regulations reveals the intricate balance between environmental responsibility and economic efficiency. In summary, this study addresses supply chain disruptions and offers actionable insights for supply chain managers and policy makers. The research highlights the importance of specific and data-driven resilience strategies to optimize supply chain performance in face of disruptions.
Despite numerous research on inventory management on firm performance, and manufacturing firm's contribution to the Ghanaian economy, its contextual impact still need much investigation because of lack of clarity and divergent findings. The study aims to investigate the impact of inventory management on firm performance of listed manufacturing firms in Ghana. The study used a cross sectional secondary data designed to test whether there is any relationship between inventory management and firm's performance of listed manufacturing firms in Ghana. The sample of this study included 140 firm-year observations from 14 listed manufacturing firms in Ghana Stock Exchange (GSE) over a 10-year period, from 2007 to 2016. Measures of firm performance which were profitability and operating cash flows were examined. Regression equations stated in the form of return on assets and operating cash flow was used in analysing firm performance data. Pearson correlation and multiple regression analysis was also used as proxies in relatedness to effective inventory management. The empirical results provided evidence that the main variable, inventory management have no effect on firm's performance and is insignificantly related to firm performance of manufacturing firms in Ghana.
Global supply chain networks foster collaboration but accelerate cross‐border risk transmission. This study investigates the effect of the 2011 East Japan earthquake on Chinese firms' import strategies. The findings reveal that the disruption led to a shift toward supply chain concentration, with firms reducing the diversification of import sources. There was a slight increase in the number of countries from which firms sourced imports but import shares became more concentrated, reflecting a reliance on fewer, centralized suppliers. Firms affected by the earthquake prioritized long‐term partnerships and sought suppliers in regions with lower natural disaster risks, aiming to mitigate supply chain vulnerabilities and reduce switching costs. The findings also show that state‐owned enterprises, private firms, and research and development‐intensive firms were more inclined to centralize their import sources. This suggests that these firms, leveraging their larger scale, substantial resources, and robust risk management strategies, favored a more concentrated sourcing approach in order to better control their supply chains and ensure stability in the face of global disruptions.
The primary purpose of this study is to review and synthesize the extant literature on the various key Operations Management areas such as; Supply Chain Management (SCM), Total Quality Management (TQM) and Circular Economy (CE) to address the critical challenges faced by organizations and develop a comprehensive framework to improve overall operational performance; and to identify future research directions. A bibliometric analysis of 1877 articles (published 1998-May 2023) and a systematic literature review using Scopus as a reliable source of academic literature. The analysis was based on an insightful combination of descriptive, thematic, and content analysis techniques. The comprehensive investigation into SCM, TQM, and CE yields significant findings contributing to these domains' evolving research landscape. The key insights include the substantial growth in interest and recognition of these topics from 1998 to 2023, suggesting dynamic shifts in research focus. The study also reveals a symbiotic relationship between SCM, TQM, and CE, enhancing traditional operational dimensions and extending the focus to sustainability, resilience, and adaptability. The study also revealed methodological diversity, incorporating quantitative and qualitative approaches, adding depth to these findings, and providing a comprehensive understanding for future research endeavors. Finally, six critical future research directions are identified. The study's implications extend beyond its immediate findings, offering a roadmap for future research, guiding practical strategies in SCM, and contributing significantly to the theoretical foundations of SCM, TQM, and CE.
In a world increasingly shaped by global disruptions—ranging from pandemics and natural disasters to geopolitical tensions—the integration of sustainable logistics practices and supply chain resilience has become a cornerstone of modern supply chain strategies. This study undertakes a bibliometric analysis of 445 Scopus-indexed documents (2002–2024) using VOSviewer and Biblioshiny, offering a systematic exploration of critical research trends, thematic clusters, and knowledge gaps within this intersection. The analysis identifies several dominant themes, including green logistics, circular economy principles, digital transformation technologies, and adaptive risk management. Findings highlight the transformative role of digital tools—such as blockchain, IoT, and AI—in enhancing supply chain transparency, predictive analytics, and operational agility. The automotive sector emerges as a focal industry, facing unique challenges of resource dependency, regulatory compliance, and the need to align sustainability with resilience frameworks. Additionally, the study underscores the growing prominence of circular economy practices, such as reverse logistics and closed-loop supply chains, in addressing environmental goals while bolstering supply chain adaptability. However, significant gaps persist, particularly in the empirical validation of sustainable logistics practices and their measurable impact on resilience outcomes across diverse regions and sectors. The study calls for the development of integrated frameworks that align environmental sustainability with technological innovation and operational efficiency, supported by longitudinal studies and cross-industry comparisons. This research contributes to academic discourse by offering actionable insights for scholars and practitioners. It establishes a foundational roadmap for integrating sustainability and resilience, emphasizing the pivotal role of digitalization and circular economy principles in shaping robust, adaptable supply chains capable of withstanding the complexities of an increasingly volatile global environment.
Businesses need resilience in supply chain logistics to efficiently manage and minimize disruptions and maintain a smooth flow of goods and services. The present study aims to examine the elements influencing supply chain resilience to enhance overall supply chain performance. A thorough literature assessment served as the foundation for the study's methodology. Two methods were employed to examine the body of knowledge on supply chain resilience: first, databases and journals were searched using specific keywords; second, the publications' references were followed to find the literature that the databases and journals had not been able to locate. When building the sample for this analysis, only publications released after 2002 were included. This strategy provided 150 high-quality research articles that served as the basis for the literature evaluation reported in this study. The research article's conclusions state that manufacturers or businesses need to consider both internal and external factors when identifying and analyzing potential supply chain interruptions. To handle hazards that have been discovered, develop a comprehensive risk management plan and rank hazards according to likelihood and possible consequences. This information could prove vital for managers and supply chain experts in manufacturing companies with useful information that helps them improve the robustness of their supply networks. Moreover, because this study highlights the connection between supply chain resilience and an organization's overall performance, it occupies a significant position in the literature. The findings suggest that a company's reputation among supply chain partners and consumers is negatively impacted by frequent interruptions to business. This finding is consistent with the crisis literature, as stated by Coombs, which shows that a firm's reputation suffers more when it bears a larger portion of the blame for a crisis. The study emphasizes strategies for supply chain resilience, including diversifying suppliers, implementing robust risk management, enhancing transparency, investing in advanced technologies, fostering collaboration, and ensuring agility and flexibility in unforeseen disruptions.
This chapter establishes the foundational concepts of Supply Chain Risk Management (SCRM), focusing on risks arising from natural disasters. It clarifies the distinctions between risk and uncertainty, emphasising their critical roles in supply chain disruptions. The chapter explores both upside and downside risks, integrating perspectives from decision theory and finance, while addressing the debate between objective and subjective risk assessments. Positioned within the broader field of Supply Chain Management, this chapter traces the evolution of SCRM from firm-level concerns to a holistic, supply chain-wide approach. By providing a detailed typology of supply chain risks and disruptions, it offers essential insights for understanding the impact of disasters on firm performance, setting the stage for deeper exploration in subsequent chapters.
This chapter explores the impact of hurricanes on supply chains and their resulting effects on stock prices. Leveraging event studies and regression analysis, it demonstrates how hurricane-induced disruptions lead to both immediate and long-term financial consequences, often triggering significant market reactions. The analysis highlights the importance of effective Supply Chain Risk Management (SCRM) and the critical role of transparent communication in mitigating these effects. The chapter reveals that detailed damage disclosures can reduce investor uncertainty, leading to more measured stock price responses. This insight underscores the necessity for businesses to prepare and respond strategically to natural disasters.
The supply chain risk management literature differentiates between disruption risk that arises from supply disruptions to normal activities and recurrent risk that arises from problems in coordinating supply and demand in the absence of disruptions (Kleindorfer and Saad 2005). Over the past decades, significant research has been carried out to better understand supply chain resilience, i.e., the ability of a supply chain to mitigate disruptions. Supply chain efficiency, i.e., the ability to mitigate recurrent risks in the absence of disruptions has been studied even longer. But only recently have the topics of efficiency and resilience been coupled in the supply chain literature. In this literature review, we focus on the intersection of supply chain resilience and supply chain efficiency. We provide a thematic overview of literature streams according to the structure of the underlying supply chains. We identify various gaps in the current literature including areas in multi-echelon and multi-product supply chain research. Furthermore, we consider dual-purpose and dedicated levers for building resilience. Dual-purpose levers are resources that are able to promote efficiency in a supply chain while enhancing resilience in expectation. By contrast, dedicated resilience levers are resources that are able to guarantee the resilience of a supply chain in the face of particular disruptions without benefiting the supply chain in the absence of disruptions. We call for more research to better understand the value of dual-purpose and dedicated resilience levers to overall supply chain performance.
Purpose
This study aims to examine the performance implications of blockchain implementation in the supply chain and explore how blockchain functions and supply chain processes of blockchain implementation moderate the effect on firm performance.
Design/methodology/approach
Using 220 blockchain implementations announced between January 2015 and December 2022, we use the event study methodology to estimate the effects of blockchain implementation on the firm value. Regression analyses are conducted to examine the moderating effects of blockchain functions and supply chain processes.
Findings
First, there is a positive and statistically significant relationship between blockchain implementation in the supply chain and firm value. Second, we find that abnormal returns from blockchain implementation are higher when used with blockchain’s contract automation function and applied in downstream processes, supporting the moderation effects.
Originality/value
The study provides empirical evidence on the effects of the blockchain implementation on firm performance, taking into account the complexity of blockchain functions and supply chain processes. It enriches the current understanding of how blockchain implementation in the supply chain contributes to firm value.
The importance of food processing industry in a developing country like Tanzania is vital for the nation’s economy as it impacts both individual owners of the business, consumers and the country’s GDP. Despite all this, the industry still faces demand unpredictability, undesired processing infrastructures and environment, problems of storage and costs associated with, distribution, transportation and logistical risks and challenges. To improve the industry, the analysis of the impact of supply chain risk management strategies on the performance of food processing companies was inevitable. This explanatory designed survey included all registered and licensed food processors in the country (TBS, 2022). The regression results revealed all four analyzed supply chain risk strategies have a significant impact on the performance of the processing companies. This implies that the supply chain risks should always be intact and established in line with the firm’s culture, structure, resources and working conditions to enable effective risk management processes and improve the performance of the industry in general.
Key Words: Food processing, Risk Management, Performance, Risk Management Strategies
Purpose
Humanitarian organizations are responsible for delivering aid under diverse circumstances in various contexts. We argue that humanitarian organizations face specific challenges in their logistics and operations. Thus, adequate supply chain risk management is required to facilitate effective and efficient humanitarian aid delivery.
Design/methodology/approach
We first identify potential supply chain risks in humanitarian aid delivery from the literature. We then utilize an expert survey to determine the probability and impact ratings of the identified risks, assessing the importance of six aggregated risk categories. To examine the influence of contingencies on a country, organization, and crisis level, we investigate the effect of ten contextual factors on the importance of different supply chain risks in humanitarian aid delivery.
Findings
We derive six relevant risk categories for humanitarian aid delivery and develop five propositions concerning criticality, context-sensitivity, relevant contingencies, and risk management approaches. Findings and propositions encourage and guide future research on the topic.
Practical implications
Risk identification and assessment support mission-specific decision-making. Our findings encourage and foster organizational learning between missions. A differentiated view of risk types allows for stronger inter-organizational collaboration within the sector and beyond.
Originality/value
This study is among the first to derive supply chain risks and categories specific to humanitarian aid delivery. Contingency analysis on a country, organization, and crisis level offers unique insights into risk management in humanitarian aid delivery.
Problem definition: Shocks that trigger supply chain disruptions inflict initial losses by damaging firms’ assets. The disruption can then cascade when an affected firm fails to deliver to its buyer, thereby interrupting the buyer’s operations, and continue thus across multiple levels (tiers) in the supply chain. To protect against such disruption cascades, firms can make ex ante investments in risk mitigation. These investments depend heavily on the operational characteristics of network participants and their interconnections. Gathering operational information can be challenging. Our aim is to shed light on the forces that govern information requirements for risk mitigation. Methodology/results: We introduce a game-theoretic model to characterize the equilibrium mitigation by firms in a decentralized arborescent network facing severe disruptions. We find that when the trigger shocks are nonconcurrent events, the equilibrium mitigation by a firm displays a limited vertical dependence on the operational attributes of suppliers that are farther away in tier (network) distance. Specifically, we show that information about a firm’s extended local neighborhood—up to its tier 2 suppliers—suffices to characterize its equilibrium mitigation. Allowing for concurrent shocks to simultaneously strike multiple firms increases the information requirement at partner firms that typically lie within two tiers downstream from the firms experiencing concurrent shocks. Managerial implications: Full supply chain visibility is costly. The literature offers little guidance on how to prioritize efforts to enhance visibility into the attributes of supply chain partners. Rather than a blanket call for greater visibility, our results proffer nuanced managerial prescriptions for the extent to which risk mitigation requires such visibility.
Supplemental Material: The online appendices are available at https://doi.org/10.1287/msom.2022.0408 .
We study the ability to renegotiate in a supply chain setting with the possibility of supply disruption. Disruptions are a real threat to supply chains, especially as the supply chains become longer and more complex. When buyers and sellers write a purchase contract, specifying every possible contingency related to disruptions may not be realistic. However, the ability to renegotiate once a disruption occurs can help buyers and suppliers find efficient solutions. We conducted a controlled laboratory experiment consisting of three studies, each exploring different conditions regarding relationship length, bargaining power, and communication. Our findings indicate that the ability to renegotiate increases buyer profit and decreases disruption inefficiency in short-term relationships but not in long-term ones. In free bargaining, where bargaining power is equal, the impact of renegotiation is greater than in ultimatum bargaining, where bargaining power is unequal. Additionally, when communication is not allowed in ultimatum bargaining, renegotiation significantly enhances buyer profit and reduces disruption inefficiency. These insights can assist managers in designing and negotiating incomplete contracts in environments prone to supply disruptions. The findings can aid managers in designing and negotiating incomplete contracts in environments with supply disruptions.
Resilience is a topic that has recently emerged concerning the basics of the construction project supply chain and we can consider it as a response to disruption in the supply chain of the project. Disruption also is an unavoidable reality in today’s complex and dynamic construction supply chain, the occurrence of which can cause irretrievable damages to the system, such as financial losses. Successful companies seek to minimize disruption and maintain adequate supply chain performance before disruption occurs, rather than looking for costly and challenging post-disruption solutions. This paper covers this gap by proposing a scenario-based mixed integer-programming model aiming to minimize logistics costs and delays, while scheduling projects to address selecting the appropriate supplier at risk of disruption. So far, this quantitative view was not presented in discussions about disruptions in the project supply chain, therefore different scenarios are applied in the process to validate the model. To improve its resilience level, this model benefits from back-up suppliers’ strategy. This study focuses on providing the required materials for the project site in an emergency without incurring additional costs using a back-up supplier. Results reveal the model’s suitability in confronting the unavailability of a supplier due to disruption.
We examine long-run firm performance following open market share repurchase announcements, 1980–1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1%. For ‘value’ stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3%. For repurchases announced by ‘glamour’ stocks, where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements.
Natural disasters, labor disputes, terrorism and more mundane risks can seriously disrupt or delay the flow of material, information and cash through an organization's supply chain. The authors assert that how well a company fares against such threats will depend on its level of preparedness, and the type of disruption. Each supply-chain risk - to forecasts, information systems, intellectual property, procurement, inventory and capacity - has its own drivers and effective mitigation strategies. To avoid lost sales, increased costs or both, managers need to tailor proven risk-reduction strategies to their organizations. Managing supply-chain risk is difficult, however. Dell, Toyota, Motorola and other leading manufacturers excel at identifying and neutralizing supply-chain risks through a delicate balancing act: keeping inventory, capacity and related elements at appropriate levels across the entire supply chain in a rapidly changing environment. Organizations can prepare for or avoid delays by "smart sizing" their capacity and inventory. The manager serves as a kind of financial portfolio manager, seeking to achieve the highest achievable profits (reward) for varying levels of supply-chain risk. The authors recommend a powerful what if? team exercise called stress testing to identify potentially weak links in the supply chain. Armed with this shared understanding, companies can then select the best mitigation strategy: holding "reserves," pooling inventory, using redundant suppliers, balancing capacity and inventory, implementing robust backup and recovery systems, adjusting pricing and incentives, bringing or keeping production in-house, and using Continuous Replenishment Programs (CRP), Collaborative Planning, Forecasting and Replenishment (CPFR) and other supply-chain initiatives.
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreac-tion, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique. 1998 Elsevier Science S.A. All rights reserved.
A number of factors, including developments in Internet-based commerce and third-party logistics, have led many companies to consider engaging in direct sales. Such a company may at once be both a supplier to and a direct competitor of any existing reseller partners (e.g., land-based retailers), which can result in “channel conflict.” This can have momentous implications for distribution strategy.
To generate managerial insights into this important issue, we develop a model that captures key attributes of such a setting, including various sources of inefficiency. We examine these in detail and identify a number of counterintuitive structural properties. For instance, the addition of a direct channel alongside a reseller channel is not necessarily detrimental to the reseller, given the associated adjustment in the manufacturer's pricing. In fact, both parties can benefit.
Finally, we examine ways to adjust the manufacturer-reseller relationship that have been observed in industry. These include changes in wholesale pricing, paying the reseller a commission for diverting customers toward the direct channel, or conceding the demand fulfillment function entirely to the reseller. The latter two schemes could be mutually beneficial in that they achieve a division of labor according to each channel's competitive advantage.
We study the value of information, production flexibility, and supplier flexibility for a good for which an initial and a subsequent order may be placed. We consider a Bayesian model of demand in which the unknown mean demand rate is assumed to have a prior, which is a mixture of two normal distributions corresponding to the demand forecast for an innovative (fashion) good. We develop three models of production flexibility: a static model requiring initial placement of both orders, a partially dynamic model requiring a fixing of the time that the second order will be made, and a fully dynamic model with no restrictions on ordering. Supplier flexibility is modeled through supply lead times. We observe that the magnitude of the savings from the static to the fully flexible model, corresponding to the sum of the values of information and production flexibility, reflects all sources of variability: differences between demand means of the prior mixture, variability within each prior, and variability about the observed mean. We observe that as the difference between high and low demand cases increases, the value of information increases, though for long lead times, production flexibility is required to take advantage of the updated information. Further, we observe that the greater the uncertainty within each prior distribution, the greater the value of information relative to the value of production flexibility, particularly for long lead times. However, the greater the uncertainty around the mean demand, which is the uncertainty that cannot be resolved through observation, the lower the value of information. Finally, we observe that the value of supply flexibility grows initially in a concave then convex manner as a function of the supply lead times.
(This article originally appeared in Management Science, April 1997, Volume 43, Number 4, pp. 546--558, published by The Institute of Management Sciences.) Consider a series of companies in a supply chain, each of whom orders from its immediate upstream member. In this setting, inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions. This paper claims that the information transferred in the form of ÜordersÝ tends to be distorted and can misguide upstream members in their inventory and production decisions. In particular, the variance of orders may be larger than that of sales, and distortion tends to increase as one moves upstreamÔa phenomenon termed Übullwhip effect.Ý This paper analyzes four sources of the bullwhip effect: demand signal processing, rationing game, order batching, and price variations. Actions that can be taken to mitigate the detrimental impact of this distortion are also discussed.
(This article originally appeared in Management Science, April 1997, Volume 43, Number 4, pp. 546–558, published by The Institute of Management Sciences.)
Consider a series of companies in a supply chain, each of whom orders from its immediate upstream member. In this setting, inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions. This paper claims that the information transferred in the form of “orders” tends to be distorted and can misguide upstream members in their inventory and production decisions. In particular, the variance of orders may be larger than that of sales, and distortion tends to increase as one moves upstream—a phenomenon termed “bullwhip effect.” This paper analyzes four sources of the bullwhip effect: demand signal processing, rationing game, order batching, and price variations. Actions that can be taken to mitigate the detrimental impact of this distortion are also discussed.
We report simulations of one-, three-, and five-year abnormal buy-and-hold stock return tests. Using benchmark portfolios purged of new-listings and rebalancing biases, we find severe misspecification of most tests, due in part to skewness. Control-firm matching also results in misspecification, particularly in large samples. We document a negative relation between skewness bias and sample size, and an overlapping-horizons bias. Both biases become more severe as the holding period lengthens. The biases interact such that tests can be well-specified in one situation but not another. A two groups test using winsorized abnormal returns yields correct specification and considerable power in many situations.
This paper documents that strategies that buy stocks that have performed well in the past and sell stocks that hav e performed poorly in the past generate significant positive returns o ver three- to twelve-month holding periods. The authors find that the profitability of these strategies are not due to their systematic risk or to delay ed stock price reactions to common factors. However, part of the abnorm al returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented. Copyright 1993 by American Finance Association.
The report argues that aid volatility is an important source of volatility for the poorest countries. Following a method already applied by the Agence Française de Développement, the report argues that loans to LICs should incorporate a floating grace period, which the country could draw upon when hit by a shock. The definition of a shock should include aid uncertainty, along with others such as commodity shocks and natural disasters. The idea is calibrated to a key IMF policy instrument towards Low-Income Countries, the Poverty-Reducing and Growth Facility (PRGF).
Le rapport montre que l’aide aux pays pauvres contribue à accroître la volatilité de ces pays. Suivant une méthode déjà élaborée par l’Agence Française de Développement, l’article propose d’accorder des crédits aux pays pauvres, qui incorporent un droit de grâce flexible, utilisable par le pays, lorsqu’il est confronté à un choc négatif, quelle qu’en soit la cause : choc d’aide, de prix des matières premières ou catastrophe naturelle. Il montre comment l’instrument utilisé par le FMI à destination des pays pauvres, le PRGF, pourrait être modifié pour ce faire.
Our simulation results show that tests for long-horizon (i.e.. multi-year) abnormal security returns around firm-specific events are severely misspecified. The rejection frequencies using parametric tests sometimes exceed 30% when the significance level of the test is 5%. Our results are robust to many different abnormal-return models. Conclusions from long-horizon studies require extreme caution. Nonparametric and bootstrap tests are likely to reduce misspecification.
In this paper, the supplier of a key component to a global manufacturer offers a one-time price discount; we study the firm's optimal response to the discount under two different strategies. In the first strategy, the firm does not pass along the discount to its customers (sales subsidiaries); the firm simply coordinates purchasing and production among the different factories to take advantage of this one-time price discount. In the second strategy, the firm offers price discounts for its most profitable products in different sales subsidiaries to increase their demand. We carried out experiments for the two strategies based on a mathematical programming model, built around Toshiba's global notebook supply chain. Model constraints include, among others, material constraints, bill-of-materials, capacity and transportation constraints, minimum lot size constraints, and a constraint on minimum fill rate (service level constraint). Unlike most models of this type in the literature, which define variables in terms of single arc flows, we employ path variables, which allow for direct identification and manipulation of profitable and non-profitable products.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.
There are two broad categories of risk affecting supply chain design and management: (1) risks arising from the problems of coordinating supply and demand, and (2) risks arising from disruptions to normal activities. This paper is concerned with the second category of risks, which may arise from natural disasters, from strikes and economic disruptions, and from acts of purposeful agents, including terrorists. The paper provides a conceptual framework that reflects the joint activities of risk assessment and risk mitigation that are fundamental to disruption risk management in supply chains. We then consider empirical results from a rich data set covering the period 1995-2000 on accidents in the U.S. Chemical Industry. Based on these results and other literature, we discuss the implications for the design of management systems intended to cope with supply chain disruption risks.
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.
Bief-the core idea The Idea in Practice-p utting the idea to work 3 What Is the Righr Supply ChaiD fo. your product? 15 Further Readilg A iist ofrelated materials, with annotations to guide further exploration of the articlds ideas and applications Product 8509 Are you frequently saddledwith exces5 in-ventory? Do yoir suffer poduct sholtages that have cultorner5 leaving sioles in a hufi Do these supplychain headaches pet' ti{ despite your investments in technolo-gies such as alnornated walehousing and Gpid logirtics? lf so, you rnay be using the wrong supply chain forthe type of poduct you sell.sup-pose your offering is funational*it sati{ies basic,unchanging needt and has a long life cycle, Iow margins. and stable demand. {Think paper towels or lighl bulbs) In this case, you need an efRcienl 5u pply chain-which minimizes productron, transpona-tion, and Storaqe coJts. BLn what il your product is mnovolive-il has great vanety, a short life cycle, high profit rlargins,and volatile denEnd? (A line oflaptopswhh a lange of novel features is one example) Forthis offering, you require a responsive supplychain. Fast and flexi' ble, i helps)lcu rnanage uncenainty through strategiet trJch as cutting lead tirnes and establishinq inventory or excess-capacny buffers. Design the right supplychain for your prod_ uct, and youl profrt! soal Forexample, by building responsiveness into lls chain, inno-vative skrwear comFEny Spon obetrmyet Rduced t5 o/er-Bnd underpoduc(ion .o!ts by half-boosling prcfits 60%.
It is understood that quantity discounts provide a practical foundation for coordinating inventory decisions in supply chains. The primary objective of this research is to test, under a variety of environmental conditions, the effectiveness of quantity discounts as an inventory coordination mechanism between a buyer and a supplier. A comprehensive simulation experiment with anova has been designed to investigate the impacts of (1) choice of quantity discount-based inventory coordination policies, (2) magnitude of demand variation, (3) buyer's and supplier's relative inventory cost structure, and (4) buyer's economic time-between-orders on the effectiveness of supply chain inventory coordination. The analytical results confirm that the quantity discount policies have managerial properties as a mediator for inventory coordination. The results also show that the performance of quantity discount-based inventory coordination policies is influenced significantly by environmental factors, such as the magnitude of demand variation, the buyer's and the supplier's inventory cost structure, and the buyer's economic time-between-orders.
In this paper, the supplier of a key component to a global manufacturer offers a one-time price discount; we study the firm's optimal response to the discount under two different strategies. In the first strategy, the firm does not pass along the discount to its customers (sales subsidiaries); the firm simply coordinates purchasing and production among the different factories to take advantage of this one-time price discount. In the second strategy, the firm offers price discounts for its most profitable products in different sales subsidiaries to increase their demand. We carried out experiments for the two strategies based on a mathematical programming model, built around Toshiba's global notebook supply chain. Model constraints include, among others, material constraints, bill-of-materials, capacity and transportation constraints, minimum lot size constraints, and a constraint on minimum fill rate (service level constraint). Unlike most models of this type in the literature, which define variables in terms of single arc flows, we employ path variables, which allow for direct identification and manipulation of profitable and non-profitable products.
We consider a market with two competing supply chains, each consisting of one wholesaler and one retailer. We assume that the business environment forces supply chains to charge similar prices and to compete strictly on the basis of customer service. We model customer service competition using game-theoretical concepts. We consider three competition scenarios between the supply chains. In the uncoordinated scenario, individual members of both supply chains maximize their own profits by individually selecting their service and inventory policies. In the coordinated scenario, wholesalers and retailers of each supply chain coordinate their service and inventory policy decisions to maximize supply chain profits. In the hybrid scenario, competition is between one coordinated and one uncoordinated supply chain. We discuss the derivation of the equilibrium service strategies, resulting inventory policies, and profits for each scenario, and compare the equilibria in a numerical study. We find that coordination is a dominant strategy for both supply chains, but as in the prisoner's dilemma, both supply chains are often worse off under the coordinated scenario relative to the uncoordinated scenario. The consumers are the only guaranteed beneficiaries of coordination.
Reducing lead time enables a company to react more quickly to demand information and, hence, to better match supply with uncertain demand. But it is only one lever for improving response capability. Managers are familiar with others (e.g., excess capacity, supplier choice, and so forth) but lack techniques to quantify the impact of adjusting these levers. Here, we enumerate a number of these levers and present a model whereby they might be combined into effective response capability. The impact of adjusting these levers is illustrated by data obtained from a skiwear manufacturer that did so. Some of the insights that resulted run counter to intuition.
We investigate how a supply chain involving a risk-neutral supplier and a downside-risk-averse retailer can be coordinated with a supply contract. We show that the standard buy-back or revenue-sharing contracts may not coordinate such a channel. Using a definition of coordination of supply chains proposed earlier by the authors, we design a risk-sharing contract that offers the desired downside protection to the retailer, provides respective reservation profits to the agents, and accomplishes channel coordination.
This research investigates the interaction between formation of logistics partnerships and supply chain restructuring in the U.S. computer industry via a survey of 30 ongoing partnerships. Partnerships that have included restructuring are compared to those that have not. Examples of representative partnerships are presented. The survey results indicate that restructurers use partnerships to facilitate restructuring. Restructurers and non-restructurers form partnerships for different reasons and realize different types of benefits. Furthermore, restructurers realize greater benefits than do non-restructurers and view their partnerships as more successful. Restructurers report dramatic improvements in logistics cost (1l-30%) and order cycle time (62%). The research contributes to the existing literature by highlighting restructuring as an important aspect of logistics partnership formation and by presenting empirical data that shows how the two strategies are linked.
We consider the problem of managing demand risk in tactical supply chain planning for a particular global consumer electronics company. The company follows a deterministic replenishment-and-planning process despite considerable demand uncertainty. As a possible way to formally address uncertainty, we provide two risk measures, “demand-at-risk” (DaR) and “inventory-at-risk” (IaR) and two linear programming models to help manage demand uncertainty. The first model is deterministic and can be used to allocate the replenishment schedule from the plants among the customers as per the existing process. The other model is stochastic and can be used to determine the “ideal” replenishment request from the plants under demand uncertainty. The gap between the output of the two models as regards requested replenishment and the values of the risk measures can be used by the company to reallocate capacity among different products and to thus manage demand/inventory risk.
We study the effect of financial risk on the economic evaluation of a project with capacity decisions. Capacity decisions have an important effect on the project̂s value through the up‐front investment, the associated operating cost, and constraints on output. However, increased scale also affects the financial risk of the project through its effect on the operating leverage of the investment. Although it has long been recognized in the finance literature that operating leverage affects project risk, this result has not been incorporated in the operations management literature when evaluating projects.
We study the decision problem of a firm that must choose project scale. Future cash flow uncertainty is introduced by uncertain future market prices. The firm's capacity decision affects the firm's potential sales, its expected price for output, and its costs. We study the firm's profit maximizing scale decision using the CAPM model for risk adjustment.
Our results include that project risk, as measured by the required rate of return, is related to the inverse of the expected profit per unit sold. We also show that project risk is related to the scale choice. In contrast, in traditional discounted cash flow analysis (DCF), a fixed prescribed rate is used to evaluate the project and choose its scale. When a fixed rate is used with DCF, a manager will ignore the effect of scale on risk and choose suboptimal capacity that reduces project value. S/he will also misestimate project value.
Use of DCF for choosing scale is studied for two special cases. It is shown that if the manager is directed to use a prescribed discount rate that induces the optimal scale decision, then the manager will greatly undervalue the project. In contrast, if the discount rate is set to the risk of the optimally‐scaled project, the manager will undersize the project by a small amount, and slightly undervalue the project with the economic impact of the error being small. These results underline the importance of understanding the source of financial risk in projects where risk is endogenous to the project design.
The extant supply chain management literature has not addressed the issue of coordination in supply chains involving risk-averse agents. We take up this issue and begin with defining a coordinating contract as one that results in a Pareto-optimal solution acceptable to each agent. Our definition generalizes the standard one in the risk-neutral case. We then develop coordinating contracts in three specific cases: (i) the supplier is risk neutral and the retailer maximizes his expected profit subject to a downside risk constraint; (ii) the supplier and the retailer each maximizes his own mean-variance trade-off; and (iii) the supplier and the retailer each maximizes his own expected utility. Moreover, in case (iii), we show that our contract yields the Nash Bargaining solution. In each case, we show how we can find the set of Pareto-optimal solutions, and then design a contract to achieve the solutions. We also exhibit a case in which we obtain Pareto-optimal sharing rules explicitly, and outline a procedure to obtain Pareto-optimal solutions.
There are two broad categories of risk affecting supply chain design and management: (1) risks arising from the problems of coordinating supply and demand, and (2) risks arising from disruptions to normal activities. This paper is concerned with the second category of risks, which may arise from natural disasters, from strikes and economic disruptions, and from acts of purposeful agents, including terrorists. The paper provides a conceptual framework that reflects the joint activities of risk assessment and risk mitigation that are fundamental to disruption risk management in supply chains. We then consider empirical results from a rich data set covering the period 1995–2000 on accidents in the U. S. Chemical Industry. Based on these results and other literature, we discuss the implications for the design of management systems intended to cope with supply chain disruption risks.
We investigate the role of options (contingent claims) in a buyer-supplier system. Specifically using a two-period model with correlated demand, we illustrate how options provide flexibility to a buyer to respond to market changes in the second period. We also study the implications of such arrangements between a buyer and a supplier for coordination of the channel. We show that, in general, channel coordination can be achieved only if we allow the exercise price to be piecewise linear. We develop sufficient conditions on the cost parameters such that linear prices coordinate the channel. We derive the appropriate prices for channel coordination which, however, violate the individual rationality constraint for the supplier. Contrary to popular belief (based on simpler models) we show that credit for returns offered by the supplier does not always coordinate the channel and alleviate the individual rationality constraint. Credit for returns are useful only on a subset of the feasibility region under which channel coordination is achievable with linear prices. Finally, we demonstrate (numerically) the benefits of options in improving channel performance and evaluate the magnitude of loss due to lack of coordination.
There are many materials for which the quantity needed by a firm is at best indirectly related to the quantity of final product produced by that firm, such as solvents in manufacturing processes or office supplies. For any such "indirect" materials, an inescapable incentive conflict exists: The buyer wishes to minimize consumption of these indirect materials, while the supplier's profits depend on increasing volume. Both buyer and supplier can exert effort to reduce consumption, hence making the overall supply chain more efficient. However, no supplier will voluntarily participate unless contract terms are fundamentally revised. This can be done through a variety of "shared-savings" contracts, where both parties profit from a consumption reduction. This paper analyzes several such contracts currently in use for chemicals purchasing. We show that such contracts can always increase supply-chain profits but need not lead to reduced consumption. We analyze equilibrium effort levels, consumption, and total profits, and show how these change with the contract parameters. We find that the goals of maximizing joint profits and minimizing consumption are generally not aligned. Also, surprisingly, a decrease in a cost parameter can lead to a decrease in profits; it may be necessary (but is always possible) to renegotiate the shared-savings contract to reap the benefits of a cost decrease.
In traditional supply chain inventory management, orders are the only information firms exchange, but information technology now allows firms to share demand and inventory data quickly and inexpensively. We study the value of sharing these data in a model with one supplier, N identical retailers, and stationary stochastic consumer demand. There are inventory holding costs and back-order penalty costs. We compare a traditional information policy that does not use shared information with a full information policy that does exploit shared information. In a numerical study we find that supply chain costs are 2.2% lower on average with the full information policy than with the traditional information policy, and the maximum difference is 12.1%. We also develop a simulation-based lower bound over all feasible policies. The cost difference between the traditional information policy and the lower bound is an upper bound on the value of information sharing: In the same study, that difference is 3.4% on average, and no more than 13.8%. We contrast the value of information sharing with two other benefits of information technology, faster and cheaper order processing, which lead to shorter lead times and smaller batch sizes, respectively. In our sample, cutting lead times nearly in half reduces costs by 21% on average, and cutting batches in half reduces costs by 22% on average. For the settings we study, we conclude that implementing information technology to accelerate and smooth the physical flow of goods through a supply chain is significantly more valuable than using information technology to expand the flow of information.
This paper provides evidence that repurchase tender offer announcements convey favorable information about the level and riskiness of future earnings. We show that analysts revise their forecasts of earnings per share upward following repurchase announcements. Repurchase announcement stock price reactions are positively correlated with revisions in short-term forecasts, but not correlated with revisions in long-term forecasts. Thus, the information is primarily about transitory changes in earnings. We also provide evidence that equity betas decline after repurchases. Our findings indicate that the equity beta decreases are due to decreases in the underlying riskiness of the firm's assets.
This paper estimates the shareholder wealth affects of supply chain glitches that resulted in production or shipment delays. The results are based on a sample of 519 glitches announcements made during 1989–2000. Shareholder wealth affects are estimated by computing the abnormal stock returns (actual returns adjusted for industry and market-wide influences) around the date when information about glitches is publicly announced. Supply chain glitch announcements are associated with an abnormal decrease in shareholder value of 10.28%. Regression analysis is used to identify factors that influence the direction and magnitude of the change in the stock market’s reaction to glitches. We find that larger firms experience a less negative market reaction, and firms with higher growth prospects experience a more negative reaction. There is no difference between the stock market’s reaction to pre-1995 and post-1995 glitches, suggesting that the market has always viewed glitches unfavorably. Capital structure (debt–equity ratio) has little impact on the stock market’s reaction to glitches. We also provide descriptive results on how sources of responsibility and reasons for glitches affect shareholder wealth.
We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (empirical rejection rates exceed theoretical rejection rates) and identify three reasons for this misspecification. We correct for the three identified sources of misspecification by matching sample firms to control firms of similar sizes and book-to-market ratios. This control firm approach yields well-specified test statistics in virtually all sampling situations considered.
In this paper a combined capital asset pricing model and option pricing model is considered and then applied to the derivation of equity's value and its systematic risk. In the first section we develop the two models and present some newly found properties of the option pricing model. The second section is concerned with the effects of these properties on the securityholders of firms with less than perfect ‘me first’ rules. We show how unanticipated changes in firm capital and asset structures can differentially affect the firm's debt and equity. In the final section of the paper we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.
This paper empirically documents the association between supply chain glitches and operating performance. The results are based on a sample of 885 glitches announced by publicly traded firms. Changes in various operating performance metrics for the sample firms are compared against a sample of control firms of similar size and from similar industries. In the year leading up to the announcement, the control-adjusted mean percent changes in operating income, return on sales, and return on assets for the sample firms are -107%, -114%, and -92%, respectively. During this same period, the control-adjusted changes in the level of return on sales and return on assets are -13.78% and -2.32%, respectively. Relative to controls, firms that experience glitches report on average 6.92% lower sales growth, 10.66% higher growth in cost, and 13.88% higher growth in inventories. More importantly, firms do not quickly recover from the negative economic consequences of glitches. During the two-year time period after the glitch announcement, operating income, sales, total costs, and inventories do not improve. We also find that it does not matter who caused the glitch, what the reason was for the glitch, or what industry a firm belongs to--glitches are associated with negative operating performance across the board.
Previously issued as WP#1913-89 in series.
We examine long-run stock and operating performance following secondary equity offerings. For a subsample of issuers in which the seller is an insider, both 3- and 5-year post-issue abnormal stock returns are significantly negative. The findings are robust to alternative long-run abnormal return measurement methodologies. The abnormal returns are large relative to the initial market reaction (the mean 5-year abnormal returns is -33.33%). The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can be attributed to managers exploiting "windows of opportunity" by issuing overvalued shares.
We analyze tests for long-run abnormal returns and document that two approaches yield well-specified test statistics in random samples. The first uses a traditional event study framework and buy-and-hold abnormal returns calculated using carefully constructed reference portfolios. Inference is based on either a skewness-adjusted "t"-statistic or the empirically generated distribution of long-run abnormal returns. The second approach is based on calculation of mean monthly abnormal returns using calendar-time portfolios and a time-series "t"-statistic. Though both approaches perform well in random samples, misspecification in nonrandom samples is pervasive. Thus, analysis of long-run abnormal returns is treacherous. Copyright The American Finance Association 1999.
This paper presents a model of stock price reactions to partially anticipated events. The model formalizes the intuition that stock price reactions reflect both the economic importance of events and the extent to which events are surprises. Unbiased estimates of the economic importance of partially anticipated events must combine stock price reactions to events with stock price movements in periods when no event occurs. The model is used to estimate the value of acquisition attempts made by frequently acquiring firms. For a sample of thirty active acquirers, the evidence indicates that acquisition attempts were profitable investment projects.
Announcements of stock repurchase tender offers are examined as a source of information to the market on the firm's future earnings prospects and market risk level. We find positive average earnings surprises and equity systematic risk reductions following tender offers but not, in most instances, preceding them. We find positive stock price reactions to tender offer announcements to be positively correlated with earnings surprises over the concurrent and subsequent two years, and negatively correlated with changes in equity and firm market risk. Finally, stock price reactions to quarterly earnings announcements are more strongly correlated with time-series based earnings surprises in the year prior to the tender offer than during the subsequent year, consistent with tender offer announcements conveying earnings information to the market.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the capital asset pricing model, (CAPM), they are called anomalies. The authors find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Their results are consistent with rational intertemporal CAPM or arbitrage pricing theory asset pricing but the authors also consider irrational pricing and data problems as possible explanations. Copyright 1996 by American Finance Association.
This article examines the relationship between top executives' trading and the long-run stock returns of seasoned equity issuing firms. Primary issuers, who sell mostly newly issued primary shares, significantly underperform their benchmarks, regardless of the top executives' prior trading pattern. However, top executives' trading is reliably associated with the stock returns of secondary issuers, who sell mostly secondary shares previously held by existing shareholders. On average, secondary issuers do not underperform their benchmarks. The results suggest that increased free cash flow problems after issue play an important role in explaining the underperformance of issuing firms. Copyright 1997 by American Finance Association.