Buying Products and Services from Whom You Know

This paper investigates whether interpersonal connections among executives affect the choice of suppliers by customers and the resulting shareholder wealth effect. We find that pre-existing social connections between customer’s executives and potential supplier executives increase the likelihood of a potential supplier becoming an actual supplier. This effect is driven by personal connections mitigating information asymmetry between the two parties and by executives currying favor to personally connected parties. We also find that the effect of social connections on supplier choice has a measurable average negative effect on customers’ future performance, suggesting that the costs of currying favors are greater than the benefits of mitigating information asymmetries.