MANAGERIAL LEARNING THROUGH CUSTOMER–SUPPLIER LINKS

• DOI: http://doi.org/10.1111/jfir.12161
• Author: Serhat Yildiz,Kathleen P. Fuller
• Published date: 01 December 2018
• Date: 01 December 2018

MANAGERIAL LEARNING THROUGH CUSTOMER–SUPPLIER LINKS

Kathleen P. Fuller

University of Mississippi

Serhat Yildiz

University of Nevada–Reno

Abstract

We provide empirical evidence that supplier firms’managers learn new information

from their customers’stock prices when they make investment, long-term financing,

short-term financing, and dividend decisions. Our findings provide novel empirical

evidence that the stock market has real effects on the economy through customer–

supplier links. Our results indicate that managerial learning is not confined to peers’or

firms’own stock prices but is a more comprehensive process that includes cross-industry

learning. Furthermore, managerial learning is not limited to investment decisions but is

also present in long-term financing, short-term financing, and dividend decisions.

JEL Classification: D22, D83, G31, G32

I. Introduction

Do firm managers learn from the information in stock prices? If the information in stock

prices affects managers’decisions, the financial markets are not sideshows but rather key

players in the real economy.

1

Dow and Gorton (1997) and Subrahmanyam and Titman

(1999) theoretically show that managers can learn from their firms’stock prices, and

managers’decisions, such as investment and financing choices, can be guided by the

information in stock prices. Empirical studies show that managers learn from the private

information in their firms’stock prices when they make investment (Chen, Goldstein,

and Jiang 2007) and saving (Fresard 2012) decisions. Huang and Zeng (2014)

theoretically predict that managerial learning across stocks is also possible. Consistent

with Huang and Zeng’s predictions, Foucault and Fresard (2014) and Ozoguz and

Rebello (2013) empirically find that managers learn from the private information in their

peers’stock prices when they make investment decisions.

We also know that the customer–supplier links are as important as peer links in

investment decisions, capital structure policies, bankruptcies, and information flow.

Research has linked the firm’s investment (e.g., Patatoukas 2012; Irvine, Park, and

Yildizhan 2015; Murfin and Njoroge 2015) and capital structure (e.g., Kale and Shahrur

We appreciate the helpful comments of our referee, Erik Devos, and the associate editor, Andy Prevost.

1

Bond, Edmans, and Goldstein (2012) survey the theoretical literature focusing on the real impacts of

financial markets.

The Journal of Financial Research Vol. XLI, No. 4 Pages 507–533 Winter 2018

DOI: 10.1111/jfir.12161

507

© 2018 The Southern Finance Association and the Southwestern Finance Association

2007; Banerjee, Dasgupta, and Kim 2008; Johnson et al. 2014) decisions to customer–

supplier relations.

2

Bankruptcy filings are associated with negative and significant stock

price effects for supplier firms (Hertzel et al. 2008). Empirical evidence for information

flow across customer–supplier links is also abundant. Suppliers’earning announcements

contain information about their customers’earnings (Eshleman and Guo 2014).

Suppliers’stock prices react to their customers’sales (Olsen and Dietrich 1985) and

earning (Pandit, Wasley, and Zach 2011) announcements. Investors’limited attention

leads to delays in information flow and return predictability across customer–supplier

links (Cohen and Frazzini 2008).

Given that cross-asset managerial learning occurs and information flows through

customer–supplier links, we argue that managerial learning may take place through

customer–supplier links. Suppliers’managers collect information about their customers

when they make investment and capital structure decisions. In addition to meetings and

contracts with customers, suppliers’managers can use customers’stock prices as an

additional information source and learn from the private information in their customers’

stock prices. Our argument closely relates to Foucault and Fresard’s (2014) theoretical

prediction that managerial learning from peers’stock prices decreases the sensitivity of a

firm’s investment to its own stock price. We suggest that supplier firms’managers learn

from the private information in their customer firms’stock prices and may rely less on

their own firms’stock prices.

3

Specifically, we examine whether as the amount of private

information in customers’stock prices increases, sensitivity of a supplier’s investment

and financing to its own stock price decreases.

Using a sample of U.S. nonfinancial firms from January 2007 to January 2015,

we find that the sensitivity of a supplier’s investment to its own stock price decreases as

the amount of private information in its customers’stock prices increases. Using Llorente

et al.’s (2002) information measure

4

as our measure of private information in stock

prices, we find that for an average supplier, a one-standard-deviation increase in the level

of informed trading in its customers’stocks reduces the sensitivity of a supplier’s

investment to a one-standard-deviation shock to its own Tobin’s Q by 52%. These results

are consistent with our hypothesis that private information contained in customers’stock

prices affects supplier managers’investment decisions. Our findings show that

managerial learning in investment policies is not limited to a firm’s own stock price

(Chen, Goldstein, and Jiang 2007) or peers’stock prices (Ozoguz and Rebello 2013;

Foucault and Fresard 2014) but also extends to customers’stock prices.

We also find that suppliers’managers learn new information from their

customers’stock prices when they issue equity or long-term debt. Specifically, for an

average supplier, a one-standard-deviation increase in its customer’s stock price

informativeness reduces the sensitivity of a supplier’s net equity issue (net debt issue) to

a one-standard-deviation shock to its own Tobin’s Q by 20% (40%). These findings

indicate that managerial learning is not limited to investment policies but it is also present

in firms’long-term capital structure policies.

2

See Section II for an in-depth literature review.

3

Hereafter, we refer to “customer firm(s)”as “customer(s)”and “supplier firm(s)”as “supplier(s).”

4

See Section III for a detailed discussion of Llorente et al.’s (2002) private information measure.

508 The Journal of Financial Research