The Effect of Self-Disclosing Misconduct on Supplier-Customer Contracting: Does It Pay to Be Transparent?
Date of Degree
Donal Byard, Monica Neamtiu
Edward X. Li
Accounting | Business | Business Administration, Management, and Operations | Business Law, Public Responsibility, and Ethics | Contracts | Criminology and Criminal Justice | Finance and Financial Management | Law and Economics | Management Sciences and Quantitative Methods | Policy Design, Analysis, and Evaluation
self-reporting, mandatory self-disclosure laws, corporate misconduct, misconduct remediation, government contracting, supply chain transparency, supplier-customer relationship
Using data on contracts with government customers, I show that corporate suppliers' self-disclosure of misconduct to customers affects their future contracting prospects with those customers. Employing a generalized difference-in-differences design, I exploit a disclosure requirement mandating supplier firms to self-disclose contract-related misconduct to their agency customers. I document a significant increase in firms' post-misconduct contracting revenues after the mandate takes effect, relative to those of comparison firms which are not subject to the mandate. I further find that in the contracts firms receive post-misconduct, agencies substitute 25% risk-mitigating fixed-price contracts for difficult-to-monitor but quality-incentivizing cost-plus contracts after the mandate takes effect. These findings suggest that self-disclosure improves firms' contracting prospects by reducing customers' expected losses from misconduct, and can substitute for costly risk-mitigating contract design. These effects are attenuated when (1) firms sustain reputational damage by over- or under-disclosing misconduct, (2) firms are repeat violators with a history of contract defaults, and (3) agency customers’ cost of switching suppliers is high. Finally, firms make fewer misstatements after adopting the mandate, consistent with customer monitoring as enabled by suppliers' transparency improves financial reporting quality.
Li, Heyun, "The Effect of Self-Disclosing Misconduct on Supplier-Customer Contracting: Does It Pay to Be Transparent?" (2022). CUNY Academic Works.
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Accounting Commons, Business Administration, Management, and Operations Commons, Business Law, Public Responsibility, and Ethics Commons, Contracts Commons, Criminology and Criminal Justice Commons, Finance and Financial Management Commons, Law and Economics Commons, Management Sciences and Quantitative Methods Commons, Policy Design, Analysis, and Evaluation Commons