Governments as customers: Exploring the effects of government customers on supplier firms’ information quality

Abstract

AbstractThis study finds that firms with major government customers have better information quality and, therefore, lower future stock price crash risks. Our main findings are robust to various tests accounting for endogeneity concerns, including propensity score matching analysis and entropy balancing method. We also conduct a difference‐in‐differences analysis based on a quasi‐natural experiment that exogenously enhances government procurement contracts’ disclosure quality. Further analysis shows that the effects of government customers are more pronounced when traditional information intermediaries are weaker (i.e., firms with lower institutional ownership and analyst coverage, of smaller size, and audited by non‐industry‐specialized auditors). Consistent with government customers improving the information quality, we also find that firms with major government customers are less likely to have SEC‐attributed restatements.