When Ignorance Is Not Bliss: An Empirical Analysis of Subtier Supply Network Structure on Firm Risk

Using a multitier mapping of supply-chain relationships constructed from granular global, firm-to-firm supplier-customer linkages data, we quantify the degree of financial risk propagation from the supply network beyond firms' direct supply-chain connections and isolate structural network properties serving as significant moderators of risk propagation. We first document a baseline fact: a significant proportion of tier-2 suppliers are shared by tier-1 suppliers. We then construct two simple metrics to capture the degree of tier-2 sharing and disentangle its effect from tier-2 suppliers' own risks. We show that the focal firms' risk levels are significantly related to the proportion of shared tier-2 suppliers in their supply network, and the effect becomes monotonically stronger as their tier-2 suppliers become more highly shared. Finally, we uncover causal relationships behind these associations using a new source of exogenous, idiosyncratic risk events in an event study setting. We show that, as tier-2 suppliers are impacted by these events, focal firms experience negative abnormal returns, the magnitude of which is significantly larger when the impacted tier-2 suppliers are more heavily shared. Overall, our study uncovers the subtier network structure as an important risk source for the focal firm, with the degree of tier-2 sharing as the main moderator. Our results also provide the microfoundation for a common structure in idiosyncratic risks and suggest the importance of incorporating the effect of subtier supply network structure in the portfolio-optimization process.

Automated summary

By analyzing granular global supply-chain data, the study quantifies the propagation of financial risk beyond direct supply-chain connections and identifies structural network properties as significant moderators of risk. Findings show that sharing of tier-2 suppliers in supply networks significantly affects focal firms' risk levels, with a stronger impact as tier-2 suppliers become more highly shared. Causal relationships are confirmed using exogenous risk events, revealing the importance of subtier network structure and tier-2 sharing as key factors in risk management.