Supply chain risk disclosure and seasoned equity offering discount

Abstract

We examine the impact of forward-looking supply chain risk disclosure (FSCRD) on information asymmetry and seasoned equity offering (SEO) discounts. Using textual analysis of the future risk subsections of outlook sections in annual reports from a sample of Chinese SEOs, we find robust evidence that a high FSCRD lowers the information asymmetry of the SEO firm, leading to a lower SEO discount. Our additional analysis shows that when an SEO firm (1) has a high financial constraint, (2) has a significant institutional investor shareholding, or (3) has a large analyst following, the impact of FSCRD on the SEO discount is more pronounced, corroborating the findings that FSCRD lowers information asymmetry and the SEO discount. Additional analysis suggests that the effect of FSCRD on information asymmetry and the SEO discount can be attributed to investors' lack of supply chain risk information and investors' lack of ability to process such information. Our findings imply that managers should consider disclosing potential supply chain risks in their firms' annual reports to leave less money on the table in SEOs.