Supplier Relationship Characteristics and Disclosure of Forward-Looking Information

This study investigates whether characteristics of supplier relationships influence the disclosure of forward-looking information. Prior literature on relationship-specific investments argues that suppliers are reluctant to invest in such assets because of the risks associated with these investments. The value of these investments to the supplier depends on the continuation of the relationship, and thus on the future performance and prospects of a buyer firm. In addition, investing in these assets results in hold-up problems, which become more severe when the buyer’s performance deteriorates. Uncertainty about buyers’ future performance therefore limits a supplier’s willingness to invest in relationship-specific assets. This provides a buyer with incentives to share reliable information about its future performance to resolve some of this uncertainty. I examine whether managers use financial reporting and disclosures to communicate this information to suppliers. I find a positive association between the importance of relationship-specific investments in supplier industries and the likelihood a buyer discloses forward-looking information. I also find that this relationship is more pronounced when suppliers have higher relative bargaining power and are thus in a position to demand such information. Overall, the findings suggest that firms use financial reporting to inform suppliers and reduce contracting frictions in supply chains. I thank the members of my dissertation committee: Philip Joos (chair), Peter Easton, Maarten Pronk and Jeroen Suijs for their helpful suggestions. I am also grateful for comments from Jan Bouwens, Stephan Hollander, Ole-Kristian Hope, Arnt Verriest and workshop participants at Tilburg University, Erasmus University Rotterdam and the 2012 EAA annual meeting.