The role of direct equity ownership in supply chains

Abstract This study examines the effect of direct equity ownership (DO) a buyer holds in its supplier on financial performance and operations of the supplier and buyer. Based on a sample of US buyer–supplier pairs from 1982 to 2017, we find that DO benefits buyer performance, but not supplier performance. The results support the view that DO mainly provides greater control for the buyer. Furthermore, we find that the performance effects of DO are moderated by firm characteristics that engender dependence. The beneficial influence of DO on a buyer's performance is more pronounced when the buyer is more innovative or operates in a more competitive environment. Our examination of the effects of DO on the operations of suppliers and buyers finds that suppliers in buyer–supplier relationships (BSRs) with higher DO invest more in relationship‐specific assets (R&D), provide more trade credits, and have lower gross profit margins. Buyers in BSRs with higher DO receive more trade credits and have lower cost of goods sold when the purchases of the buyer from the supplier make up a high proportion of the buyer's cost of goods sold. Overall, these results suggest that DO primarily benefits the buyer at the expense of the supplier, a finding that is consistent with the effects of bargaining and control power of the buyer. We discuss the implications of these findings for practitioners and for extensions to both relational and resource dependence theories.