Operational Disruptions, Firm Risk, and Control Systems

Forthcoming in Manufacturing & Service Operations Management

39 Pages Posted: 13 Jul 2020 Last revised: 7 Oct 2020

See all articles by William Schmidt

William Schmidt

Cornell University - Samuel Curtis Johnson Graduate School of Management

Ananth Raman

Harvard University - Technology & Operations Management Unit

Date Written: June 17, 2020

Abstract

Operational disruptions can impact a firm's risk, which manifests in a host of operational issues, including a higher holding cost for inventory, a higher financing cost for capacity expansion, and a higher perception of the firm's risk among its supply chain partners. While disruptions have been studied extensively in the operations management literature, the emphasis has been on mitigating the deleterious impact on the firm's production potential rather than its risk. We examine whether implementing and credibly attesting to having effective internal control systems will meaningfully influence the impact of operational disruptions on the firm's risk and market valuation. We exploit a 2004 regulatory change that required certain firms to attest to having control systems in place. Our triple difference regression specification takes advantage of a regulatory anomaly that excluded a well-defined set of firms from complying with the control system requirement. We find that firms that were obligated to comply with this regulatory requirement experienced a materially smaller increase in their risk and a smaller decrease in their market value in the aftermath of an operational disruption. Firms that were not obligated to comply with this requirement did not experience such benefits in the aftermath of a disruption, and instead experienced a larger increase in their risk. Fostering a better understanding of whether credible control systems can reduce the impact of disruptions on the firm's risk and value is important as it identifies a broader set of mitigation strategies available to operations managers. This can help managers achieve a better fit between their risk mitigation initiatives and their objectives and budget constraints.

Suggested Citation

Schmidt, William and Raman, Ananth, Operational Disruptions, Firm Risk, and Control Systems (June 17, 2020). Forthcoming in Manufacturing & Service Operations Management , Available at SSRN: https://ssrn.com/abstract=3629801 or http://dx.doi.org/10.2139/ssrn.3629801

William Schmidt (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Ananth Raman

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States
617-495-6937 (Phone)
617-496-4059 (Fax)

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