Information transmission along supply chains: Stock price reaction of suppliers upon a customer's release of qualitative risk information

Abstract

We examine suppliers' stock price reaction to the disclosure of qualitative risk information from important customers. By leveraging recent advances in textual analysis, we quantify customers' qualitative information disclosure and use it to gauge the spontaneous stock price reaction of the supplier's stock. Using a sample of 2028 customer-supplier-firm observations in China, we find that, on average, the stock price of a supplier negatively reacts to its customer's qualitative risk information disclosure. Our findings are robust to alternative metric of qualitative risk disclosure, alternative metric of stock price reaction, after accounting for customer stock returns, and after mitigating selection bias. Moreover, when comparing the magnitudes of coefficients, we find the impact of the qualitative risk information disclosure on suppliers' stock price is larger than the firm, industry, and macroeconomic information embedded in the same annual report; its value is also greater than the impact of a customer's negative stock price. Last, we show that the adverse impact of customers' qualitative risk information disclosure is more salient if the customers are relatively important or the information is more useful to investors. We discuss implications of our findings to supply chain risk management.