The Effect of Supplier IPOs on Major Customer Firm Value

Abstract

This paper examines how supplier IPO events impact customer firms' value. Building on a bargaining-power framework, we argue that supplier IPOs provide suppliers with opportunities to reduce their reliance on existing customers, potentially leading to adverse outcomes for these customers. Our analysis reveals that customers experience significant value loss following supplier IPOs. Specifically, customers exhibit negative abnormal returns over long-term horizons, and Tobin's Q for customer firms declines significantly post-IPO. Exploring the underlying mechanisms, we find that supplier IPOs lead to increased customer-base diversification and reductions in trade credit extended to customers, reflecting a shift in suppliers' reliance and bargaining power. These findings highlight the broader implications of supplier IPOs for customer firms within supply chain networks.