Circular Economy and Idiosyncratic Risk: A Supply Chain Network Perspective

ABSTRACT The financial performance outcomes of a circular economy ( CE ) strategy have been extensively documented, yet its impact on idiosyncratic risk remains unclear. Drawing on signaling theory and social network theory, this study investigates how CE performance influences idiosyncratic risk at both the firm and supply chain levels using panel data of Chinese manufacturing firms from 2013 to 2022. The results show that stronger CE performance mitigates idiosyncratic risk by signaling firms' long‐term potential and reliability, and that this effect is stronger for firms with higher labor productivity, longer listing age, and state ownership. Moreover, our results suggest that the CE performance of supply chain partners show distinct associations with a focal firm's idiosyncratic risk. Specifically, buyer CE performance is positively associated with idiosyncratic risk, whereas supplier CE performance exhibits an inverted U‐shaped relationship. The study offers theoretical and practical implications for corporate sustainability and risk management.