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Linguistic Information Quality in Customers' Forward‐Looking Disclosures and Suppliers' Investment Decisions

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  • Can Chen
  • Jeong‐Bon Kim
  • Minghai Wei
  • Hao Zhang

Abstract

This study examines whether and how linguistic information quality (measured by readability) of customer firms' management earnings forecast reports (MEFRs) affects supplier firms' investment quality (measured by investment efficiency). Our analyses reveal that supplier investment efficiency is positively associated with the average linguistic information quality of customers' prior MEFRs, and the positive association between supplier investment efficiency and customer MEFRs' numerical information quality is stronger in supplier firms with more readable customer MEFRs. Our analyses also reveal that higher linguistic information quality of customer MEFRs improves the monitoring of supplier firms by their outside stakeholders, such as institutional investors and financial analysts, and ameliorates the negative impact of suppliers' customer‐dependence on their investment efficiency. Our results suggest that greater linguistic information quality of a customer firm's forward‐looking disclosures is associated with higher‐quality investments made by its suppliers along the supply chain. Qualité linguistique des informations prospectives communiquées par les clients et décisions des fournisseurs en matière d'investissement Les auteurs se demandent si la qualité linguistique des informations — selon le critère de la lisibilité — que communiquent les sociétés clientes (les clients) dans les rapports de la direction sur les prévisions de résultats (RDPR) influe sur la qualité des investissements des sociétés fournisseurs (les fournisseurs) — selon le critère de l'efficience — et, le cas échéant, comment s'exerce cette influence. Leurs analyses révèlent que l'efficience de l'investissement du fournisseur est en relation positive avec la qualité linguistique moyenne des informations communiquées dans les RDPR précédents des clients, et que la relation positive entre l'efficience de l'investissement du fournisseur et la qualité des informations numériques des RDPR du client est plus marquée chez les fournisseurs dont les clients produisent des RDPR plus lisibles. Leurs analyses révèlent également que la qualité plus élevée des informations communiquées dans les RDPR des clients permet aux parties prenantes externes comme les investisseurs institutionnels et les analystes financiers d'effectuer un meilleur suivi des fournisseurs, et qu'elle atténue l'incidence négative de la dépendance des fournisseurs à l’égard des clients sur l'efficience de l'investissement. Les résultats obtenus semblent indiquer qu'une plus grande qualité linguistique des informations prospectives communiquées par un client est associée à une plus grande qualité des investissements des fournisseurs de la chaîne logistique.

Suggested Citation

  • Can Chen & Jeong‐Bon Kim & Minghai Wei & Hao Zhang, 2019. "Linguistic Information Quality in Customers' Forward‐Looking Disclosures and Suppliers' Investment Decisions," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1751-1783, September.
    • Handle: RePEc:wly:coacre:v:36:y:2019:i:3:p:1751-1783
    DOI: 10.1111/1911-3846.12471
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    References listed on IDEAS

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    1. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    2. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
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    Cited by:

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    2. Yingying Xin & Xiao Zeng & Zhengying Luo, 2022. "Customers' tone in MD&A disclosure and suppliers' inventory efficiency: Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3833-3853, December.
    3. Li, Yanqiong & He, Jie & Chan, Kam C., 2021. "Information transmission along supply chains: Stock price reaction of suppliers upon a customer's release of qualitative risk information," International Journal of Production Economics, Elsevier, vol. 239(C).
    4. Biehl, Henrike & Bleibtreu, Christopher & Stefani, Ulrike, 2024. "The real effects of financial reporting: Evidence and suggestions for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    5. Kuo Zhou & Xianghui Jin & Xinru Li & Yunqing Tao, 2024. "Enhancing sustainable development through effective disclosure: Corporate environmental performance and readability," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 274-291, January.
    6. Guo, Chenhao & Zhang, Sirui & Chen, Sian, 2024. "Does carbon risk travel along the supply chain? Evidence from corporate default risk," Economics Letters, Elsevier, vol. 236(C).
    7. Sun, Zeyu & Yang, Ge & Bai, Haichen, 2023. "The spillover effect of customers' financial risk on suppliers' conservative reporting: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 87(C).
    8. Huang, Wan & Bai, Yufan & Luo, Hong, 2024. "Customer identity concealing and insider selling profitability: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 85(C).
    9. Changyun Wang & Chenyu Wang & Weixing Wu, 2023. "Customers' stock price crash risk and suppliers' investment inefficiency: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 5069-5092, December.

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