When Supply-Chain Disruptions Matter

Supply-chain disruptions can have a material effect on company value, but this impact varies considerably and countermeasures can be costly. Thus, it is important for managers and investors to recognize the types of disruptions and the organizational factors that lead to the worst outcomes. Prior research remains unsettled as to whether improvements to firm operational efficiency aggravate or alleviate the impact of disruptions. Improved operational efficiency may leave firms more exposed when a disruption occurs, or it may improve firms’ agility and allow them to respond more effectively to a disruption. We hypothesize that the impact of improved operational efficiency depends on whether the disruption is due to factors that are internal versus external to the firm and its supply chain. Examining more than 500 disruptions, we find that a higher rate of improvement in operating performance aggravates the impact of internal disruptions but not external disruptions. Finally, we take advantage of the enforcement date of Section 409 of the Sarbanes Oxley Act to show that managers exhibit systematic bias in the disruptions they choose to announce. We control for this effect in our model specifications. ∗Harvard Business School, Soldiers Field Park, Boston MA 02163. E-mail: [email protected]. †Harvard Business School, Soldiers Field Park, Boston MA 02163. E-mail: [email protected].