Withholding Bad News When Competing Peers Have Common Customers

Abstract

This paper examines whether and how existing competitors producing similar products and supplying to common corporate customers (connected peer firms) influence a firm's strategic disclosure of adverse information. Results show that when faced with intense competition from existing competitors, managers tend to withhold disclosing bad news, a finding further supported by three sources of exogenous variation in competition from the connected peer firms. Potential competition from non-connected peers, however, is negatively associated with managerial bad news withholding behavior. Finally, we find that customer-connected peers, customers, and investors play a crucial role in shaping the managerial practice of adverse news disclosure.

Keywords: Competitive Peer Threats; Common Customers; Crash Risk; Bad News Disclosure

JEL Classification: G11, G23, G32