The Real Effect of Stock Prices on the Supply Chain

We investigate whether suppliers utilize information in customer stock prices to guide investment decisions. Using mutual fund flow-driven price pressure to identify exogenous negative shocks to stock prices, we show that suppliers decrease relationship-specific investments (RSI) following declines in their customers’ market values. Specifically, suppliers reduce R&D and suppliers and customers generate fewer related patents. The effect is not driven by industry-wide trends and is robust to controlling for the customer’s own investment, the supplier’s own stock price pressure, and rival stock prices. Our findings suggest that information in stock prices affects investment decisions by other product market participants.