There is a growing literature on the stock price of a firm influencing the actions of the firm’s managers. To what extent do managers at other firms rely on the information in the stock price of a given firm? The forthcoming paper “Stock Market Information and Innovative Investment in the Supply Chain,” by Lantian Liang, Ryan Williams, and Steven Chong Xiao, addresses this question by looking at how suppliers react to changes in the market value of customers. Specifically, the authors examine the effect of changes in Tobin’s q of a customer in a given year on investment in innovation at a supplier in the future. The two measures of innovative activity they consider are based on (i) R&D investment by the supplier the following year, and (ii) the number of patents filed by the supplier over the following two years. A one-standard-deviation in Tobin’s q at a customer is followed by an over 7.5% increase in each of their measures of future innovation at the supplier. These correlations are consistent with the supplier reacting to changes in the market value of the customer (to be fair, they are also consistent with the supplier and the stock market reacting to a common source of information about the customer). The authors also use CARs when a customer announces a new product as an explanatory variable, and find that a one-standard-deviation in the customer CAR increases the number of customer-related patents at a supplier in the future by a similar order of magnitude. These results enhance our understanding of how the stock price of a firm may communicate information to parties that transact with the firm.
Spotlight by Uday Rajan
Photos courtesy of Lantian Liang, Ryan Williams, and Steven Chong Xiao