Cross-market information transmission along the supply chain network

In this paper, we investigate whether and how investors of suppliers learn from the private information embedded in the customer credit default swap (CDS) market prior to customer earnings announcements. We find that investors of suppliers indeed incorporate the customer private information revealed in the CDS market into the supplier valuation, thereby leading to significant changes in suppliers' future stock prices. Moreover, such price discovery effect is more pronounced when: (i) the level of customer private information revealed in the CDS market is more prominent; (ii) the customer bond market is more illiquid; (iii) the customers are expected to report bad earnings news or experience deteriorated credit conditions; (iv) the strength of the supplier-customer economic bond is stronger. Our results remain robust when we control for the supplier's own CDS market price discovery effect or conduct matched sample analyses. Finally, utilizing the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as an exogenous shock, we show that the effect of customer CDS trading on suppliers' future stock prices is less pronounced after the Dodd-Frank Act due to more explicit regulation on informed trading activities. Overall, our study documents significant cross-market information transmission along the supply chain network (i.e., from the customer derivative market to the supplier equity market).