A long literature examines the role of firms’ voluntary disclosures in facilitating monitoring and valuation by capital providers or withholding public information from competitors. However, little is known about how firms use their disclosures to coordinate with non-investor stakeholders. One particularly important set of non-investor stakeholders consists of firms’ supply chain partners, which are particularly prone to information-related agency conflicts. We study how vertical integration, as an alternative to arm’s length contracting, shapes firms’ voluntary disclosure of information that can be useful for resolving these agency conflicts with supply chain partners.

Theoretical studies suggest that public disclosure can facilitate contracting relationships, both by adding credibility to private communications and signaling to contracting partners who lack credible private communication channels. For example, Ferreira and Rezende (2007) consider how disclosing a firm’s strategy can serve as a commitment device for managers to maintain their strategic plans, which allows supply chain partners to invest according to the disclosing firm’s strategic commitments. The notion that firms have incentives to disclose information publicly is predicated on firms’ inability to privately communicate credibly with their current and potential suppliers and customers; otherwise, public disclosure would be redundant and would not facilitate coordination. While supply chain partners can exchange information privately (e.g., about sales expectations, new product developments, etc.), public information can facilitate communication between partners to the extent the disclosure is considered more credible given the costs resulting from untruthful public disclosure (e.g., legal fines).

While disclosure is theoretically useful for coordinating along the supply chain, the internalization of transactions within firm boundaries partially eliminates information problems between customers and suppliers—e.g., due to more aligned interests between managers and a reliance on internal communication systems. Consequently, internalizing production along the supply chain—i.e., vertical integration—tends to reduce the benefits of public disclosure for coordination between suppliers and customers. Therefore, we predict that increased vertical integration is associated with less voluntary public disclosure.

To study this question, we collect information about firms’ vertical integration using the measure developed by Fresard et al. (2020). A primary benefit of this measure is that it is based on 10-K discussions largely intended to capture the internalization of production along the supply chain. We validate that our measure of vertical integration captures the internalization of production inputs along the supply chain—rather than solely capturing the transfer of shared intangible capital, like managerial oversight, that many vertical linkages are used for (see, e.g., Atalay et al., 2014, who find that nearly half of upstream establishments do not ship output to downstream units inside of the firm). To do so, we first show that a one standard deviation increase in vertical integration is associated with a 6.57% within-firm increase in inter-segment sales. Moreover, we find that a one standard deviation increase in vertical integration is also associated with a 5.34% decrease in the download activity of a firm’s SEC filings by its suppliers and customers, consistent with vertical integration reducing the demand for public disclosures by supply chain partners.

Next we examine the extent to which vertical integration relates to the supply of public information. We focus on firms’ voluntary product strategy disclosures, since these can be particularly informative for the decisions of supply chain partners. In this context, disclosure serves two main purposes. First, it can help smooth the development of new production strategies. For example, a supplier that anticipates making a new product can make the necessary investment earlier. Second, product disclosure can also reveal information about a firm’s comparative advantage and production capacity, thereby signaling its ability to fulfill implicit contractual claims.

Using two measures of product disclosures—based on textual analysis of annual reports and press releases—for a sample of 62,202 firm-year observations from 1997 through 2017, we find that, holding constant the number of supply chain partners, vertical integration is negatively correlated with both product disclosure measures: a one standard deviation increase in vertical integration is associated with a 4.49% within-firm reduction in product-related disclosure. Moreover, research on vertical integration shows that many firms use vertically linked segments both to transfer intangible production inputs—e.g., shared management practices—in addition to transferring inputs along the supply chain. Given the setting analyzed by Ferreira and Rezende (2007), we expect and find that our results are most pronounced when vertical integration is used to transfer production inputs along the supply chain. Overall these results are consistent with our prediction that vertical integration reduces firms’ need to use public disclosures for supply-chain coordination.

One threat to our inferences is that firms may jointly decide their vertical integration and disclosure strategies. For instance, recent accounting studies show that competition from potential entrants can have different effects on firms’ disclosure, and vice versa. We perform two sets of cross-sectional tests to better attribute the decrease in disclosure to a reduction in the usefulness of disclosure for supply chain coordination following the internalization of production. In our first set of tests, we examine whether our results vary as predicted by Ferreira and Rezende (2007)—i.e., that the value of specific investments and managerial career concerns moderate this relation, proxied by (i) investment intensity and (ii) shorter-term CEOs, respectively. Using each of these measures, we find consistent evidence that the reduction in product disclosure following vertical integration is more pronounced for firms with greater relationship-specific investment and managers with stronger career concerns.

We then examine whether the reduction in disclosure following an increase in vertical integration varies with the credibility of firms’ communication (Gigler, 1994), and expect our results to be muted when firms’ public communication channels are less credible. We find that the reduction in product disclosure following vertical integration is less pronounced when firms have less credible public disclosures, as proxied by a recent intentional financial misstatement by managers. We also find that the reduction in product disclosure following increased vertical integration is more pronounced at firms that can less credibly communicate privately with supply chain partners, as proxied by the duration of supply chain relationships.

Finally, to corroborate our inference that vertical integration reduces voluntary disclosure, we exploit a natural experiment that unexpectedly forces firms to outsource part of their operations. We rely on the incidence of major natural disasters that disrupt firms’ production. We find that following a major natural disaster, firms are (1) more likely to contract with new suppliers and (2) more likely to voluntarily disclose product-related information using our two measures of product disclosure in annual reports and press releases. Moreover, these effects of natural disasters occur immediately after their occurrence and do not exhibit any pre-trends. Overall, these results are further consistent with the notion that a firm’s degree of vertical integration reduces the need for providing voluntary disclosure.

Our paper contributes to the literature on how industrial organization shapes disclosure decisions. Emerging disclosure literature draws more prominently from the industrial organization literature that highlights how inter-firm contracts appear to be a key determinant of disclosure decisions beyond the traditional valuation and monitoring channels. These studies identify how voluntary disclosure can contribute to horizontal coordination among industry peers (Bourveau et al., 2020; Bertomeu et al., 2021; Kepler, 2021). In these studies, disclosure helps achieve a cooperative equilibrium that departs from a perfectly competitive one. Unlike these studies, ours builds on economic theory pertaining to friction around relationship-specific investments. Our study contributes to this recent literature by suggesting that vertical integration reduces the need for supply chain coordination through public disclosures about products.

We also contribute to the accounting literature that examines the role of nonshareholder stakeholders in shaping disclosures. While the vast majority of the empirical disclosure literature focuses on capital providers or competitors as the primary audiences for disclosures, our results illuminate a novel and important additional audience—current and potential suppliers who wish to better understand firms’ future production and technological capacities. In this way, our results relate to recent literature on the role of disclosure in government relationships (e.g., Bova et al., 2015; Samuels, 2021; Huang, 2022), customers’ proprietary cost concerns (e.g., Cho et al., 2020; Chen et al., 2022; Chiu et al., 2022), supply chain bargaining positions (e.g., Cen et al., 2018; Hribar et al., 2022), and facilitating communication of earnings and sales forecasts to suppliers (Crawford et al., 2020). Our study contributes to this line of work by studying the largely unexamined role of public disclosure in facilitating cooperation among supply chain partners.