Effect of Customers’ Risk Factor Disclosures on Suppliers’ Investment Efficiency

• In Event: Customers and Disclosure

Abstract

In this study, we examine the effect of downstream firms’, i.e., customers’, risk factor disclosures contained in annual reports on the investment efficiency of upstream firms, i.e., suppliers. We find that informative disclosures of customers’ risk factors are associated with less under- or overinvestment by suppliers. In addition, this association is stronger for suppliers in durable goods industries, those with customers operating in more concentrated industries, and those whose customers’ risk factor disclosures are more dissimilar across years. Overall, the results suggest that risk factor disclosures provided by the customers for capital market participants have a spillover effect on the input market and help suppliers make investment decisions.

Authors

• Tzu-Ting Chiu, Norwegian School of Economics

• Jeong-bon Kim, City University of Hong Kong

• Zheng Wang, City University of Hong Kong