Win－Win Growth Activities and Long－Term Earnings in the Supply Chain

[Purpose] This study analyzes key issues in supply chain management, particularly subcontracting practices, and their impact on earnings persistence in a context where interest in the social (S) aspect of corporate activities is increasing. Recently, investors have been continuously demanding that companies engage in sustainable activities in terms of environmental, social, and governance (ESG) factors. From the perspective of supply chain due diligence, unfair subcontracting practices can hinder a company’s ESG efforts, potentially threatening its survival and sustainable growth. [Methodology] This study examines the relationship between the fairness of subcontracting management and earnings persistence by using the Win－Win Growth Index disclosed by the Korea ESG Standards Institute to measure the fairness of subcontracting practices. Specifically, this study aims to empirically analyze the impact of the disclosure of Win－Win Growth Index ratings and the level of those ratings on corporate earnings persistence. [Findings] We find that firms with the Win－Win Growth Index disclosed by the Korea ESG Standards Institute have a significant positive (＋) relationship with earnings persistence compared to firms without the disclosure. Furthermore, firms that received a “Best” rating on the Win－Win Growth Index have a significant positive (＋) relationship with earnings persistence compared to those that did not. [Implications] The findings suggest that the Win－Win Growth Index is useful for enhancing earnings persistence. Specifically, this paper underscores the necessity of fair subcontracting activities, along with the operation of various monitoring activities and systems for fair subcontract management, to further improve earnings persistence. As a result, we expect that the findings of this study will facilitate increased corporate participation in supply chain management by presenting its earnings enhancing effect.