Information Externalities in Capital Markets: The Economic Determinants of Suppliers’ Stock Price Reaction to Their Major Customers’ Information Events

In a commentary on information transfer research, Schipper (1990) notes that when compared to whether information transfers exist or not, “so far little attention has been given to explaining how such transfers operate.” In this study we develop and test hypotheses about the economic determinants of information externalities suppliers experience at the time of their major customers’ information events. Our focus is on explaining how information transfers operate. Thus, our study pushes information transfer research forward, along the lines suggested in Schipper (1990). We find that information externalities are increasing in the: (1) major customer’s seasonally-adjusted change in cost of goods sold, (2) magnitude of information disclosed by the customer, (3) strength of the economic bond between the supplier and its major customer and (4) supplier’s market power relative to other firms in its industry. Our evidence of significant information transfer from major customers to their suppliers indicates that such effects are not limited to firms in the same industry (i.e., intra-industry information transfer), but extend across the supply chain.