How do suppliers benefit from customers’ voluntary disclosure? the effect of customers’ earnings guidance on upstream firms’ investment efficiency

• Published in: Journal of accounting and public policy Vol. 41; no. 1; p. 106880
• Main Authors: Chiu, Peng-Chia, Jiu, Lili, Yu, Po-Hsiang
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.01.2022; Elsevier Sequoia S.A
• Subjects: Companies; Consolidation; Customers; Disclosure; Earnings; Earnings announcements; Efficiency; Forecasting; Information; Investment efficiency; Investments; Management earnings forecast; News; Suppliers; Supply; Supply chain; Textual analysis; Voluntary disclosure; Supply chain; Voluntary disclosure; Textual analysis; Investment efficiency; Management earnings forecast
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2021.106880

•Suppliers benefit from customers’ earnings guidance to achieve greater investment efficiency.•Suppliers invest more efficiently when customers issue more informative, disaggregated, and accurate forecasts.•There is an asymmetric response of suppliers’ investments toward customers’ good-news versus bad-news forecasts.•Supply chain relevant information in customers’ earnings guidance reports plays a complementary role in facilitating supplier’s investment efficiency. We explore whether and how the issuance of customers’ financial forward-looking information affects the investment efficiency of their upstream firms. Using earnings guidance as a proxy for forward-looking information, we find that firms wherein customers disclose earnings forecasts invest more efficiently than those where customers withhold forward-looking information. Our findings hold after controlling for a set of firm characteristics, employing alternative model specifications and measurements, and using the 2011 Thailand flood as a quasi-experiment. Further analyses offer support that the positive impact of customers’ earnings guidance on upstream firms’ investment efficiency is stronger for customers issuing more informative, disaggregated, and accurate forecasts and suppliers with weaker bargaining power. We also observe an asymmetric response of suppliers’ investments toward customers’ good-news versus bad-news forecasts. Furthermore, by conducting a textual-based analysis, we find that suppliers’ investment efficiency increases with more embedded supply chain relevant information in customers’ earnings guidance reports. Overall, our findings suggest that suppliers benefit from customers’ earnings guidance to better assess their investment decisions, thereby achieving greater investment efficiency.