Customer Horizontal Mergers and Firm Voluntary Disclosures

This study examines how horizontal mergers of major customers affect voluntary disclosure of suppliers. On the one hand, major customer mergers increase investor uncertainty about the supplier firm’s future sales prospects, leading to increased investor demand for supplier voluntary disclosure. On the other hand, customer horizontal mergers also lead to higher manager uncertainty, increasing the cost of providing public disclosure. In addition, customer horizontal mergers result in a more concentrated customer base, which lowers a major customer’s cost of accessing the supplier firm’s private information and thereby reduces the customer’s demand for public disclosure from the supplier. We find that supplier firms’ managers provide more voluntary disclosure in the year following a major customer horizontal merger, as compared to matched control firms. We further find cross-sectional evidence that this effect is significantly stronger for supplier firms with a greater increase in investor uncertainty around the horizontal merger, with lower increase in manager uncertainty about post-merger sales prospects, and with a lower increase in post-merger customer concentration, consistent with the predicted impacts of the above three forces on supplier voluntary disclosure in the customer horizontal merger setting. Collectively, the results suggest that horizontal mergers of downstream customers can influence voluntary disclosure of upstream suppliers, and that on average, the increase in investor demand for voluntary disclosure due to investor uncertainty outweighs the counteracting effects of heightened manager uncertainty and lower customer demand for supplier public disclosure after horizontal mergers.