Supplier Relationship Characteristics and the Discretionary Disclosure of Forward-Looking Information


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Abstract

This paper investigates whether characteristics of supplier relationships influence a firm’s decision to voluntarily disclose forward-looking information. Prior literature on relationship-specific investments argues that suppliers are reluctant to invest in relationshipspecific assets. The value to the supplier of these investments depends on the future financial prospects of a firm. Relationship-specific investments also result in a hold-up problem for the party undertaking the investment. Information asymmetry between a firm and its suppliers and the inability of contracts to specify all potential contingencies makes such investments risky to
the supplier. Financial reporting can serve as a reliable source of information to suppliers, which may mitigate this information asymmetry problem and reduce the risks as perceived by suppliers of investing in such assets. Using two measures that capture the importance of relationshipspecific investments by a firm’s supplier, I find results consistent with this argument. In addition, I find that the disclosure of forward-looking information is more likely when suppliers are in a position to demand such information; i.e., when suppliers have higher bargaining power due to higher market concentration.

Edith Leung is Doctoral Candidate at Tilburg University. Her current research interests are Adoption of International Financial Reporting Standards, influence of non-financial stakeholders (suppliers and competitors) on financial reporting decisions.

 
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Paulo Perego

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