Abstract
We examine how the adverse selection faced by customers affects the market's response to SEO announcements by their suppliers. We find that firms with a large customer experience a more negative SEO announcement return than those without a large customer. Large customers also experience a negative stock price response around their suppliers' SEO announcements. The announcement returns of SEO firms and their customers are lower when the extent of information asymmetry between the issuing firm and customer is more severe, when the relationship breakup cost is high, and when the post-SEO relationship is more likely to weaken. We also find that after the SEO, the length of the relationship, the investment in relationship specific assets, and the reliance on the large customer deteriorate significantly, further supporting the view that SEO announcements by firms with a large customer convey negative information about the value of the customer-supplier relationship.
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