2.1. Theoretical Background
A few studies attempted to lay theoretical foundations for connecting SCM and firm performance by employing a variety of organizational theories. For example, Grover and Malhotra
) provide a comprehensive review on the conceptual and empirical connections between transaction cost economics (TCE) and operations management (OM) and SCM. The authors encourage OM/SCM researchers to draw from this intriguing theory to guide their hypothesis development. The key objective of TCE is to maximize firm performance by minimizing transaction costs within and across the boundaries of organizations (Ketchen and Hult 2007
). In order to reduce transaction costs throughout supply chains, Hobbs
) suggests that co-operations, teamwork, and rapid data of exchange between supply chain partners should be implemented.
Resource-based view (RBV) is another widely-accepted theory in strategic management. RBV views a firm as a collection of unique and inimitable resources that provides the basis for its strategic competition and primary source of returns. According to RBV, firms create performance advantages by integrating sets of resources to enhance organizational capabilities. These resources should be neither too simple to be imitated by competitors, nor so complex to defy internal steering and control. Being viewed as “a digitally enabled inter-firm process capability” (Rai et al. 2006
), SCM helps establish such organizational capabilities and leads to superior financial performance. Research attentions have been paid to the application of RBV in supply chain financial performance. For example, Seggie et al.
) employ RBV to examine the impact of specific IT resources, such as IT alignment and SC communication systems, on brand equity and firm performance. Drawing from RBV, Zhu and Kraemer
) illustrate the relationship between financial performance and e-commerce capability for manufacturing companies. By reviewing relevant literature, Gold et al.
) extend the application of RBV to the inter-organizational level and demonstrate how supply chain collaborations in environmental and social issues generate sustained competitive advantages.
2.2. Empirical Findings
There have been extensive interests in empirically investigating the relationship between corporate reputation and firm value in the literature. Although general wisdom indicates that corporate reputation is a critical part of a firm’s intangible assets to gain competitive advantage, whether and how it contributes to financial performance is still a debated issue in empirical research.
Some studies successfully established a positive relationship between firm reputation and financial performance. Based on Fortune Magazine’s American’s Most Admired Corporations from 1984 to 1998, Robert and Dowling
) find that firms with relatively good reputation can persistently maintain superior financial outcomes. Using reputational data from a large-scale survey of 30 largest German firms, Eberl and Schwaiger
) investigate the effect of corporate reputation on future financial performance. Specifically, they decompose the concept of reputation into cognitive and affective factors. After controlling for past performance, they find that these two reputational dimensions affect financial performance in different ways. The cognitive component, which is similar to the one used in Robert and Dowling
), makes a positive contribution to future financial performance, whilst the affective component has negative impacts.
However, not all the studies recognize the positive financial contributions of firm reputation. For example, Rose and Thomsen
) investigate the causal relationship between a firm’s reputation and financial performance, i.e., the market-to-book ratio. Using reputational data from a Danish business journal, they find that the corporate reputation does not improve financial performance, whereas past financial performance has a positive impact on corporate reputation. Based on an Australian reputation index known as RepuTex, Inglis et al.
) found no causal relationship between corporate reputation and financial performance in either direction. However, rather than challenging the common wisdom on financial impacts of firm reputation, the authors cast doubts on the validity of RepuTex and called for more reliable measures of corporate reputation.
In SCM, several studies have employed the AMR 25 list as a reputation measure to examine its impacts on a firm’s financial performance. From a practitioners’ perspective, Swink et al.
) combined the AMR 25 list and other data sources to identify leading SCM firms in various industries, and found that the leading SCM firms significantly outperformed comparable companies in almost all operational and financial metrics. The average monthly stock returns of the leading SCM firms were also significantly higher than their close competitors. They suggested that some performance metrics, such as ROA, SG&A/sales, and working capital/sales, where the most powerful indicators to differentiate the leading SCM firms from their rivals. Ellinger et al.
) use expert opinion data in the 2007–2009 AMR 25 list to examine how SCM excellence is related to firm-level financial success measured by Altman’s
) Z-score statistic. The empirical results demonstrate that the leading SCM firms have significantly higher Altman’s Z-score than close competitors and industry averages. Using similar datasets from the 2007–2010 AMR 25 lists, Ellinger et al.
) identify a positive relationship between SCM excellence and customer satisfaction rates, measured by the American Customer Satisfaction Index (ACSI). Meanwhile, they find that leading SCM firms exhibit higher level of shareholder value than their respective competitors.
There are several motivations for our study to further explore this small but growing body of knowledge. First, although Hendricks and Singhal
) have shown that announcements of supply chain glitches significantly deteriorate a firm’s stockholder value in both short- and long-time periods, it was not fully tested that SCM excellence, on the other hand, is able to boost firm values. Second, the existing studies in this area are either outdated or limited. As a matter of fact, all the new data of the annual AMR 25 list after 2010 has not been used in research projects. Even if the annual AMR 25 list was utilized in previous studies, researchers have not drawn its full advantages. For example, Ellinger et al.
) only retrieve expert opinion data from the AMR 25 list to avoid confounding effects of financial information. Third, previous studies usually adopt accounting tools to measure firm performance. It is well known that these tools are not effective to fully capture the influences of SCM performance (Shi and Yu 2013
). For example, although Altman’s Z-score is widely employed to predict bankruptcy likelihood, it lacks the capability of measuring intangible financial benefits and their comprehensive effects in financial markets. In general, these retrospective measures do not provide forward-looking indication on the financial impacts of SCM excellence.
2.3. Research Hypothesis
By assuming perfect information and investor rationality, the efficient market hypothesis (EMH) asserts that financial markets are efficient enough to incorporate market information into equity prices promptly (Fama 1970
; Fama and French 1993
). Both TCE and RBV imply that SCM excellence imposes positive contributions to certain aspects of financial performance, such as revenue, operating costs, and working capital (Christopher and Ryals 1999
; Presutti and Mawhinney 2007
). Given an efficient financial market, SCM leading firms would receive positive reactions from the financial market that recognizes their SCM excellence. Thus,
Hypothesis 1 (H1).
SCM leading firms generate positive abnormal returns over the market portfolio when the information is released to the public.
At the same time, we expect that the abnormal returns would be stable no matter which market index or benchmark model is used:
Hypothesis 2 (H2).
The abnormal returns are robust across common market indexes and benchmark models in event study research.
Moreover, EMH states that stock prices are able to adjust to new public information very rapidly in an unbiased fashion. Therefore, no excess returns would be earned by continuously trading on that information. It implies that the abnormal returns generated by the press-release of SCM excellence are not sustainable. As a result, the third research hypothesis is as follows,
Hypothesis 3 (H3).
The abnormal returns that are generated by the release of the AMR 25 list diminish over time.