The Real Effect of Stock Prices on the Supply Chain

60 Pages Posted: 21 Nov 2014 Last revised: 4 Jan 2018

Ryan Williams

University of Arizona - Department of Finance

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: June 1, 2017

Abstract

We investigate whether suppliers utilize information in customer stock prices to guide investment decisions. Using mutual fund flow-driven price pressure to identify exogenous negative shocks to stock prices, we show that suppliers decrease relationship-specific investments (RSI) following declines in their customers’ market values. Specifically, suppliers reduce R&D and suppliers and customers generate fewer related patents. The effect is not driven by industry-wide trends and is robust to controlling for the customer’s own investment, the supplier’s own stock price pressure, and rival stock prices. Our findings suggest that information in stock prices affects investment decisions by other product market participants.

Keywords: Corporate investment, real effects of financial markets, supply-chain contagion, stock mispricing

JEL Classification: G31

Suggested Citation

Williams, Ryan and Xiao, Steven Chong, The Real Effect of Stock Prices on the Supply Chain (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2528021 or http://dx.doi.org/10.2139/ssrn.2528021

Ryan Williams

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Steven Chong Xiao (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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