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Information Externalities Along the Supply Chain: The Economic Determinants of Suppliers’ Stock Price Reaction to Their Customers’ Earnings Announcements

49 Pages Posted: 4 May 2010 Last revised: 16 Jan 2011

Shail Pandit

University of Illinois at Chicago

Charles E. Wasley

University of Rochester - Simon Business School

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business

Date Written: December 14, 2010

Abstract

We study the economic determinants of the information externality suppliers experience at the time of their customers’ quarterly earnings announcements (QEAs). We measure the information externality as suppliers’ stock price reaction to their customers’ QEAs. We expect information externalities to arise because the information revealed in customers’ QEAs can revise investors’ expectations about the level of suppliers’ future earnings and cash flows, and or because it resolves uncertainty about those future earnings and cash flows. We find that the information externality experienced by suppliers is increasing in the: (1) magnitude of the new information disclosed at customers’ QEAs; (2) strength of the economic bond between the firms, (3) components of the earnings information disclosed by a customer, (4) level of macroeconomic uncertainty prevailing at the time of customers’ QEAs; and decreasing in suppliers’ earnings persistence. We also find that the information contained in customers’ QEAs leads to both a revision in beliefs about the level of suppliers’ future earnings, as well as to a resolution of uncertainty about such earnings. Our study adds to the literature which seeks to understand the economic factors that lead to cross-sectional differences in earnings informativeness. However, unlike prior studies which have focused on examining the factors that determine “own-firm” stock price reactions to earnings, we identify the economic factors that lead to cross-sectional differences in the informativeness of one firm’s earnings (e.g., a customer’s) to investors of a another, non-announcing firm (e.g., a supplier). Our study also extends prior research by documenting that information externalities are not limited to firms in the same industry but also extend to firms in the supply chain.

Keywords: Information externalities, Information transfers, Customers, Suppliers, Supply Chain

JEL Classification: D80, G10, M41

Suggested Citation

Pandit, Shail and Wasley, Charles E. and Zach, Tzachi, Information Externalities Along the Supply Chain: The Economic Determinants of Suppliers’ Stock Price Reaction to Their Customers’ Earnings Announcements (December 14, 2010). AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Paper; UIC College of Business Administration Research Paper No. 10-09. Available at SSRN: https://ssrn.com/abstract=1600394 or http://dx.doi.org/10.2139/ssrn.1600394

Shailendra Pandit (Contact Author)

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
(312) 355-1331 (Phone)
(312) 996-4520 (Fax)

HOME PAGE: http://business.uic.edu/faculty/shailendra-shail-pandit

Charles E. Wasley

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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