The Effect of a Major Customer’s Information Quality on Its Supplier’s Investment Decisions

Abstract

In this study, I examine the role that a major customer's information quality plays in a supplier's investment decisions. I propose that the flow of high-quality information from a customer to its suppliers reduces a supplier's uncertainty and increases supplier investment. Using variation in the customer's disclosures as proxies for information quality, I find evidence that suppliers face less uncertainty, have higher investment levels, and are less responsive to observed uncertainty when their customers have higher quality information. The effect on suppliers appears to be driven by the customers' demand related information, as customer sales guidance is related to supplier investment, but earnings guidance is not. I use restatements as an additional proxy for customer information quality and continue to find reduced sensitivity to uncertainty. These results build on the literature in accounting that investigates information spillovers from one firm to another and provide evidence that customers are a source of information that can mitigate the negative effects of uncertainty. I received helpful comments and suggestions from Hailey Ballew, Brent Schmidt,

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