The Effect of a Major Customer’s Information Quality on Its Supplier’s Investment Decisions
57 Pages Posted: 22 Oct 2019 Last revised: 1 Nov 2019
Date Written: April 10, 2019
I examine the influence of a major customer’s information quality on a supplier’s investment decision-making process. I propose that the flow of high-quality information from a customer reduces a supplier’s uncertainty about its return on investment and increases the supplier’s investment level. Using the customer’s voluntarily disclosed guidance as a proxy for information quality, I find evidence suggesting that suppliers face less uncertainty, invest more in working capital, and are less responsive to uncertainty when their customers provide higher quality information. The effect on suppliers appears to be attributable to the customers’ demand-related information, since customer sales guidance is related to supplier investment, but customer earnings guidance is not. I use restatements as an additional proxy for customer information quality and continue to find evidence that the customer’s internal information influences supplier investment. These results contribute to prior research investigating (1) information spillovers from one firm to another, (2) the information flow from customers to suppliers, and (3) the link between internal information quality and disclosure quality.
Keywords: Supply Chain, Investment, Customer, Supplier, Disclosure
JEL Classification: M41, G31
Suggested Citation: Suggested Citation