Contractual Private Disclosure in Supply Chain and Managerial Learning from Stock Price

Abstract

I examine whether contracts that obligate the customer to periodically disclose to the supplier its forecast of future demand for the supplier's products (“DF contracts”) influence the supplier's reliance on stock prices when making corporate investment decisions. If managers find customer demand forecasts a more direct and less noisy signal of investment opportunities than stock prices, managers may shift some weight away from stock prices when making investment decisions. Using novel hand-collected data on DF contracts, I find that suppliers' corporate investments become significantly less sensitive to stock prices after suppliers enter a DF contract for the first time, compared to the corresponding change for control firms over the same time period. The primary result is more pronounced when demand forecast disclosures are more credible, for suppliers with higher demand uncertainty, and for suppliers with highly irreversible investments. The supplier's future performance, as measured by return on assets, significantly improves after entering a DF contract, and the improvement is greater for suppliers with larger post-DF decline in investment-price sensitivity. Collectively, the results appear to be consistent with the notion that suppliers, after entering a DF contract, increase the reliance on private demand forecasts from customers and, in turn, decrease the reliance on stock prices to guide their investment decisions. Overall, this study sheds light on the real consequences of contractual private disclosures in supply chains.