What is it about?
We look at the role of government customers in improving a supplier firm’s information environment. The results show that firms with major government customers, firms with more major government customers, and firms with more sales to major government customers are less likely to have stock price crashes (large stock price drops) in the following year than firms without major government customers, especially when conventional information intermediaries and strong external audits are not in place.
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Why is it important?
We show an externality of government spending in the stock market. That is, government spending can prevent managers from withholding bad news from the stock market, and therefore improve overall market efficiency and quality. In addition, our findings have important policy implications. In particular, our findings provide initial evidence that transparency and audit of public procurement contracts create economic benefits for government contractors and the stock market. This indicates the importance and value of having such regulations for government procurement contracts.
Perspectives
This is an interesting research project. A related paper by Chen et al. (2019) finds that corporate customers incentivise firms to withhold bad news. In contrast to their finding, we show that government customers have an opposite effect. Our findings suggest that one specific type of customer—government—improve supplier firms’ information environment by preventing managers from withholding bad news from the stock market.
Ting-Chiao Huang
Monash University
Read the Original
This page is a summary of: Governments as customers: Exploring the effects of government customers on supplier firms’ information quality, Journal of Business Finance & Accounting, April 2021, Wiley,
DOI: 10.1111/jbfa.12530.
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