How do suppliers benefit from customers' voluntary disclosure? the effect of customers' earnings guidance on upstream firms' 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. (c) 2021 Elsevier Inc. All rights reserved.

Automated summary

This study explores the impact of customers' issuance of financial forward-looking information on the investment efficiency of their upstream firms. The findings reveal that firms where customers disclose earnings forecasts exhibit higher investment efficiency compared to those where customers withhold forward-looking information. Further analyses indicate that the positive impact is stronger for customers providing more informative, disaggregated, and accurate forecasts, as well as for suppliers with weaker bargaining power. The study also highlights the importance of embedded supply chain relevant information in customers' earnings guidance reports for suppliers' investment efficiency.