Ariel Rava is an Assistant Professor of Accounting at Yeshiva University. This post is based on a recent paper by Professor Rava, Nicholas Seybert, Associate Professor at the University of Maryland, Musa Subasi, Associate Professor at the University of Maryland, and Emanuel Zur, Associate Professor at the University of Maryland.
Buyer–supplier relationships often hinge on what economists call relationship-specific investments (RSIs). These are tailored capabilities and assets that create unique value in the partnership but lose much of their usefulness elsewhere. Because such investments are difficult to redeploy, they expose suppliers to risk. Once committed, the customer might exploit the situation, renegotiating terms or capturing more value for themselves. Classic transaction cost economics (TCE) teaches that firms protect against this hazard with contracts, safeguards, or vertical integration. However, these mechanisms treat opportunism as a constant, assuming that all customers are equally risky partners. Our research asks a different question: do observable characteristics of the individuals who lead customer firms systematically alter the supplier’s perceived exposure to opportunism and, in turn, its willingness to invest?
Trust reduces perceived risk and encourages cooperation. Yet most accounts of supply chains still assume “the firm” acts as a uniform actor. In reality, individuals at the top play a pivotal role. Their choices and values set the tone for how contracts are interpreted, how problems are solved, and how conflicts are handled when surprises arise. We argue that the personality of the customer’s CEO offers an observable signal about how the firm will behave under uncertainty. Drawing on psychology’s Big Five framework, which includes openness, conscientiousness, extraversion, agreeableness, and neuroticism, we propose that these traits shape expectations of fairness, adaptability, and stability. For example, openness signals adaptability, agreeableness signals fairness, extraversion fosters communication, conscientiousness conveys reliability, and lower neuroticism reflects steadiness under stress. These cues are especially important when contracts are incomplete and RSIs are vulnerable.
To test this idea, we examine CEO turnovers at customer firms, which serve as natural resets in buyer–supplier relationships. When a new CEO steps in, the understandings forged with the predecessor vanish, and suppliers must reassess their expectations. Using linguistic tools that measure Big Five traits from CEOs’ unscripted speech in earnings calls, we study how suppliers adjust their behavior before and after leadership changes. Specifically, we look at the extent to which suppliers align their R&D spending with their customers’ R&D. A decline in alignment signals reluctance to invest in the relationship, while an increase reflects confidence and willingness to commit. READ MORE »
