Do Customer Disclosures Affect Suppliers' Internal Capital Allocation Decisions?

This study examines whether customer disclosures affect how supplier firms allocate capital across business segments. Customer disclosures can shape supplier investment decisions through two competing channels. They can improve suppliers' information about downstream demand, helping suppliers align capital with growth opportunities ("information channel"), or erode incumbent suppliers' private information advantage, inducing costly investments to defend customer relationships ("competitive-threat channel"). I use the adoption of SFAS 131 as a customer-level disclosure shock. Suppliers exposed to expanded customer disclosures experience increased product-market competition and reallocate capital toward segments with relatively weak growth-opportunity signals. Suppliers that deviate from allocations predicted by growth signals are more likely to preserve market share and expand their customer base in subsequent years. Using a novel approach to link supplier segments to customer segments, I show that this reallocation is driven by investing in capacity in affected segments, rather than by a correction of prior under-investment. Consistent with the competitive-threat channel, the investment adjustment is stronger for segments linked to larger customers and for segments operating in more concentrated industries. Segments making these investments subsequently experience lower ROA, consistent with suppliers accepting lower profitability to defend customer relationships. Overall, the findings show that disclosures can shape how economically linked firms allocate capital internally.