Trustworthiness Change and Relationship Continuity after Contract Breach in Financial Supply Chains

• Published date: 01 October 2018
• Author: Ha Ta,Terry L. Esper,Sebastian Garcia‐Dastuge,Kenneth Ford
• DOI: http://doi.org/10.1111/jscm.12180
• Date: 01 October 2018

TRUSTWORTHINESS CHANGE AND RELATIONSHIP

CONTINUITY AFTER CONTRACT BREACH IN FINANCIAL

SUPPLY CHAINS

HA TA

Clarkson University

TERRY L. ESPER

The Ohio State University

KENNETH FORD

Wake Forest University

SEBASTIAN GARCIA-DASTUGE

University of Arkansas

The management of financial flows in the supply chain is an integral part

of effective supply chain management and is an emerging research area. A

breach in the relationships between firms and financial providers may not

only affect the financial health of the focal firms, but also disrupt the

financial stability of their supply chains. Building on life-cycle theory, this

research examines the critical role of trustworthiness in the financial sup-

ply chain relationships in the event of a contract breach. Although litera-

ture has established that trustworthiness is vital to interfirm supply chain

relationships, we further propose that changes in trustworthiness are par-

ticularly relevant when interfirm relationships are impacted by negative

shocks such as contract breaches. Trustworthiness change (TC), therefore,

is likely to serve as a key determinant in the nonbreaching party’s decision

to continue on in a relationship. Using archival data from multiple data

sources, we find evidence that TC significantly influences the likelihood of

relationship continuity in the aftermath of contract breaches, and that the

effect is not linear. In addition, the effect is stronger for breaches that

occur earlier in the duration an interfirm relationship, and when the

breaches are less severe. These findings offer several important implica-

tions for both financial supply chain relationship theory and practice,

which are discussed in the paper.

Keywords: buyer-supplier relationships; service supply chains; contracting; finance

INTRODUCTION

The management of financial flows along the supply

chain (SC) has long been considered a primary pillar

of supply chain management (SCM) (Croom,

Romano, & Giannakis, 2000; Mentzer et al., 2001).

This domain, referred to as “financial supply chain

management” (FSCM) (Pfohl & Gomm, 2009; Wut-

tke, Blome, & Henke, 2013b), has recently garnered

specific research attention (Gelsomino, Mangiaracina,

Perego, & Tumino, 2016) to explore how financial

matters can influence material and information flows

within and between companies in the SC (Martin &

Hofmann, 2017). The FSCM literature builds on the

notion that access to finances is not only essential to

the survival of individual firms, but can also cause rip-

ple effects on the performance of other SC entities

(Babich, Burnetas, & Ritchken, 2007; Hertzel, Li, Offi-

cer, & Rodgers, 2008; Wagner, Bode, & Koziol, 2009).

This financial interconnectedness of firms in SCs

can perhaps best be captured by examples like

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Journal of Supply Chain Management

2018, 54(4), 42–61

©2018 Wiley Periodicals, Inc.

mega-retailer Toys R Us, whose recent bankruptcy dec-

laration forced several of its upstream SC vendors into

financial defaults (Rucinski, Naidu, & Fares, 2018).

The Toys R Us illustration highlights the vital role

that the FSCM ecosystem (including buyers, suppliers,

and all financial intermediaries such as banks) plays in

facilitating effective SC execution and operations (More

& Basu, 2013; Wuttke, Blome, Foerstl, & Henke,

2013a; Wuttke et al., 2013b).It suggests that the effec-

tiveness of FSCM issues can often lie in the overall

financial health and trustworthiness of SC entities,

including their credit ratings and ongoing relationships

with banks and other financial institutions. Interest-

ingly, research on financial health and trustworthiness

issues is currently missing in the nascent FSCM litera-

ture (Gelsomino et al., 2016), even though financial

stability is critical to sustaining SC exchange opera-

tions. Furthermore, the concept of trustworthiness in

the broader SC relationship literature is often underde-

veloped (Read, Jin, & Fawcett, 2014). The purpose of

this research is to address these issues.

Trustworthiness is defined as the extent to which rela-

tionship entities display characteristics that inspire trust

(Mayer, Davis, & Schoorman, 1995), and has been a

foundational concept in interfirm relationship litera-

ture (Colquitt & Rodell, 2011).Our research highlights

the idea of “trustworthiness change” (TC) by building

on the theory of relationship lifecycles and the

dynamic nature of relational constructs (Palmatier,

Houston, Dant, & Grewal, 2013).TC is defined here as

the magnitude and direction of change in trustworthiness

levels. Inspired by the notion that interfirm relation-

ships are inherently dynamic, whereby relational

behaviors and attitudes tend to ebb and flow as rela-

tionships progress through the relationship lifecycle

(Autry & Golicic, 2010; Claycomb & Frankwick,

2004), TC is proposed as an important factor when

investigating relationship issues over time. This is of

particular importance when managing financial SC

flows, since differences in trustworthiness levels would

potentially result in higher cost and financial instabil-

ity for SCs (Wuttke, Blome, Sebastian Heese, & Pro-

topappa-Sieke, 2016).

In exploring TC in the financial SC, we also focus on

a vital trust-impacting event in relationship lifecycles—

a contract breach. We are particularly interested in

relationship continuance in light of breach events to

understand why exchange partners choose to continue

financial service-based relationships with entities that

have breached contracts. Contract breaches have been

shown to cause detrimental losses to relationship par-

ties, such that they often trigger reduced relational sat-

isfaction and performance (Eckerd, Boyer, Qi, Eckerd,

& Hill, 2016; Griffith & Zhao, 2015) and can damage

relational trust and result in relationship termination

(Johnston, McCutcheon, Stuart, & Kerwood, 2004).

We contend that it is important to consider the

impacts of trustworthiness and contract breach in the

context of the relationship lifecycle, whereby relational

occurrences are part of a series of prior and future rela-

tional exchange components. We focus on TC because

a snapshot of trustworthiness at a certain time may

not be an adequate indicator of its longer term impli-

cations or how it will change in the future, especially

in the aftermath of a contract breach. Furthermore, a

single assessment of trustworthiness does not consider

relative comparisons to prior trustworthiness levels.

The foundational proposition of this study is that

TC is central to relationship continuity after a contract

violation—for example, after a corporate loan default

in our FSCM context. In other words, our core argu-

ment is that relationship continuity is more likely

when the defaulting/breaching party is able to signal

favorable changes in trustworthiness. In addition to

this primary research proposition, we also examine

the potential curvilinear effects of trustworthiness,

potential moderating impacts of specific characteristics

of contract breach, and do so from the vantage point

of suppliers (in this case, loan providers). By analyz-

ing longitudinal financial loan data that captured pre-

and postcontract breach relational dynamics, we

objectively identify both the severity and timing of

contract breaches, and investigate the moderating

effects of these contract components on the relation-

ship between objective proxy measures for changes in

trustworthiness and relationship continuity.

Although we focus on the loan industry and finan-

cial SC exchanges, the implications of this research

are broader in reach and impact. Dyads in the loan

sector are representative of buyer-supplier relation-

ships, in that the borrowing firm is the “buyer” of

capital products, and the “lender” is the “supplier”.

Once loans are awarded, the firms and banks (len-

ders) become partners in seeking satisfactory results

for both parties (Focarelli, Pozzolo, & Casolaro,

2008), since the failure of the deal would not only

leave the borrowers without funds, but would also

jeopardize the standing of the lender. Therefore, the

borrower-lender relationship is representative of a

buyer-supplier relationship, with mutual benefits and

objectives as well as frequent interactions. This ren-

ders the financial loan industry as applicable to

explore trustworthiness impacts over the duration of

business-to-business relationships, as such explo-

ration can inform the broader space of trustworthi-

ness across all relationships in SCs.

By investigating trustworthiness in the context of the

loan industry, we contribute to the foundational

understanding of the role of financial exchange rela-

tionships and the role of financial institutions as

members of the extended SCs. In a broader sense, our

findings highlight several implications regarding TC,

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