The Effect of Supplier Relationships on Disclosures of Forward-Looking Information

Abstract

This study investigates whether the need for supplier relationship-specific investments influences the disclosure of forward-looking information. Prior literature on relationship-specific investments argues that suppliers are reluctant to invest in relationship-specific assets, since the value to the supplier depends in part on the prospects of the customer. Since the customer is likely better informed about its own prospects, credible disclosures of forward-looking information are relevant to the supplier's investment decision. I examine whether managers use financial disclosures to convey this information to suppliers. Using firm-level data of customer-supplier relationships, I find that supplier relationship-specific investments are positively related to a customer's disclosure of forward-looking information in segments and management forecasts. More importantly, I show that the loss of a relationship-specific supplier, which creates a need for a new supplier, strongly increases the likelihood of initiating forward-looking disclosures in the following period. I find that proprietary costs reduce the association between supplier investments and disclosure, although this result is sensitive to the measure of proprietary costs used. Overall, the findings suggest that disclosures are important beyond capital markets and play a role in supply chain contexts.

Keywords: Financial disclosures, supplier relationships, proprietary costs, transaction cost economics

JEL Classification: M41