research

Do Customer Disclosures Affect Suppliers’ Internal Capital Allocation Decisions? (SSRN)

Committee Members: Sugata Roychowdhury (chair), Ronald Dye, Jung Min Kim, Mihir Mehta

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.

Do Companies Use Their Nonprofits to Earn Profits?

This study investigates whether companies use donations to nonprofits as a means to earn profits through political connections. While previous research highlights the regulatory and legislative benefits of political influence, evidence of pecuniary benefits derived from the nonprofit channel remains limited. This research focuses on the electric utility industry and uses the regulatory framework for determining electric rates to assess the profitability of this strategy. The findings reveal that (a) the profit earned per dollar from charitable contributions is lower than that from campaign contributions, (b) companies allocate approximately ten times more funds to donations than to lobbying, and (c) total profits derived from philanthropic spending exceed those from lobbying efforts. Overall, this paper provides valuable insights into the profitability of corporate philanthropy as a tool for political influence.