Public and Private Information Channels along Supply Chains: Evidence from Contractual Private Forecasts

Abstract

Firms along the supply chain rely on both public disclosures and private information exchanges to develop forecasts about future performance. In this paper, we examine how a firm’s public and private channels of information sharing with its trading partners affect information spillovers along supply chains. First, we document the general phenomenon of bias spillover in supply chains; i.e., a supplier’s management forecast bias is positively associated with its customer’s forecast bias. Second, using a novel, hand-collected dataset, we investigate whether a customer’s commitment to provide private forecasts mitigates the bias spillover by allowing the supplier to better detect strategic biases in the customer’s public forecasts due to capital market incentives. We find that bias spillover is significantly reduced when the customer commits to providing regular private forecasts, and that private forecasts are more important for reducing bias spillover when the customer has strong incentives or ability to bias its public forecasts. Overall, our paper highlights the interplay of private and public communication between trade partners.