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customer firm’s earning announcement, those who follow major customer exhibit better
forecast accuracy. They argue that the stronger the economic link between suppliers and
customers, the greater degree of complementary information between them; therefore
increase their forecast accuracy as result.
Cohen and Frazzini (2008) find return predictability across economically linked
firms. They give an example of Callaway and Coastcast to show that it is investors’
inattention to company link that provides significantly predictable returns across
customer-supplier firms. Investors ignore publicly available information about economic
links when they know there is a shock to one firm; thus the stock price of related firms
will adjust with a lag to the shock of related firms, leading to predictable returns. Shahrur,
Becker, and Rosenfeld (2010) using international data across 22 developed countries,
show that the return of customer industries leads the return of supplier industries. Their
finding is consistent with the view of Cohen and Frazzini (2008) that stock price does not
totally reflect publicly available information about economically linked companies.
Hertzel, Li, Officer, and Rodgers (2008) show that financial distress and bankruptcy affect
a filing firm’s suppliers. They find that during customers’ bankruptcy filing and pre-filing
distress period, suppliers’ abnormal returns are, on average, significantly negative. This
effect is more severe when the customers’ rival appears to experience contagion. They
explain that suppliers may have fewer opportunities to switch to different customers when
the whole industry impairs, and the supplier may have economic relations with rivals of
customer that also suffer. They also examine on the filing firm’s customer and find little
evidence of this effect.
2.3.3 Debt Market Perspective
Some studies talk about the association between customer-supplier relationship and
loan contract. Kim, Song, and Zhang (2015) find that for suppliers whose major customers
have a higher weighted-average return on asset, these suppliers enjoy lower rate, longer
maturity, and fewer covenants for their loans. This is more pronounced when the supplier
has no prior lending relationship with the lead banks, and when the economic tie between
supplier and major customer is stronger. Customers with poor performance are more likely
to fail to pay to their suppliers, and poor performance is likely to lower future demand for
supplier’s products or service. This would affect supplier’s future cash flow and increase
future default risk. They suggest that banks do take customer’s earning performance into
account when having contract with the supplier firms, and the effect varies with the
strength of customer-supplier relationship. Chen et al. (2014) argue that the reputational