Vertical Information Transfers: The Association between Retailers' Sales Announcements and Suppliers' Security Returns

Accounting research has documented an association between the occurrence of at least some types of disclosures made by a firm (e.g., earnings announcements, accounting changes, or capital structure changes) and that firm's security return. As yet, however, there is little evidence about the relation between information disclosures made by one firm and security prices of other firms, although cross-sectional relations among security prices, sometimes described as industry factors, are well documented (e.g., King [1966], Schipper and Thompson [1983], and Smith [1981]). One possible explanation for this cross-sectional association is that information disclosures made by one firm may provide relevant information about other firms. Recently, Foster [1981] examined the impact of earnings announcements on the security prices of other firms in the same industry. Foster documented statistically significant security returns for nonannouncing firms in ten industries at the time of large security returns for announcing firms within the same industry. These intraindustry information transfers suggest news releases of other firms within an industry are used in the determination of a given firm's security price.