Regulatory Costs and Vertical Integration: Evidence from Supply Chain Disclosure Regulations
Enshuai Yu  1@  
1 : Boston College

I study whether and how supply chain disclosure regulations shape corporate vertical boundaries. I employ a 2010 California corporate disclosure mandate designed to eradicate human trafficking and slavery in supply chains. This mandate elevates costs to firms that rely on supply chain parties, specifically reputational and litigation risk, other stakeholder pressure, and information acquisition and monitoring costs. As a result, to better control their supply chains, affected firms vertically integrate, primarily via acquiring supply chain parties. The effect is concentrated among firms facing greater stakeholder pressure (e.g., plaintiffs, consumers, NGOs, and shareholder activists), higher sourcing risk, and asset specificity. Also, following the regulation, affected firms increase overall vertical integration and reduce outsourcing to suppliers. Collectively, my findings suggest that supply chain disclosure regulations incentivize firms to become more vertically integrated.


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