(Public) information sharing is a plus

Information sharing among supply chain partners is critical due to the information asymmetry inherent in relationships between customers and suppliers. For example, customers of an intermediate firm in the supply chain may directly interact with finished-product end users and thus possess more precise information about market demand conditions. In addition, imperfect information about a contracting partner's behavior increases concerns about opportunistic behavior by business partners -- e.g., reneging on contractual obligations. Thus, information sharing plays an important role in facilitating coordination and monitoring in supply chain collaborations. One feasible way to share information among potential contracting partners along the supply chain is via public disclosure.
While firms can arguably communicate with partners through private channels, public disclosure may still be incrementally useful for several reasons. First, public disclosure can be more cost-effective in the presence of a large number of current and potential supply chain partners that are all concerned about the firm's future business plans in order to meet their own production needs. Second, information conveyed through public channels can be more credible than privately shared communication, because public disclosures are subject to litigation and reputation considerations.
Illustrating the role of information about firms' overall product strategy in facilitating coordination between firms and their suppliers and customers, the chief procurement officer at Mondi Group recently highlighted the role of transparency about ongoing innovation between her group and its suppliers in improving their own products, acknowledging that supplier -- enabled innovation means that you build working relationships with selected suppliers, with full transparency around areas of innovation where you match, so you can enhance innovation together."
By publicly disclosing information to supply chain partners, firms can credibly signal their production strategy, allowing supply chain partners to better coordinate their own production decisions. However, this need for public disclosure in coordinating production is predicated on the presence of current or potential vertical contracting relationships. Thus, if firms have a reduced reliance on vertical supply chain partners as part of their production process, then public disclosure becomes redundant and is no longer valuable for coordination purposes. Therefore, internally organizing vertical production processes reduces and, in the limit, eliminates the usefulness of public disclosure as a coordination mechanism with supply chain partners.

We examine whether and how vertical integration affects the supply of public information. We focus on firms' voluntary product strategy disclosures since these can be particularly informative for their contract counterparties along the supply chain. In the context of supply chain contracting, product strategy disclosure serves two main purposes. First, it can smooth the development of new production strategies. For example, a supplier that anticipates the production of a new product can engage earlier in the necessary investment to supply its existing client. Second, product disclosure can also reveal information about a firm's competitive advantage and production capacity, thereby signaling its ability to fulfill its implicit contractual claims.
Using two measures of product disclosures -- based on textual analysis of annual reports and press releases -- for a sample of 62,231 firm-year observations from 1997 through 2017, we find that vertical integration is negatively correlated with both product disclosure measures. We also find that firms that become more vertically integrated reduce public disclosure about their product and that the reduction is (i) less pronounced for vertically integrated firms in relationships that entail less credible public disclosures, (ii) more pronounced among firms which rely more on public disclosures when private communication is less feasible ex ante.
Thus, while most prior disclosure literature focuses on the monitoring and valuation roles of public disclosure, the collective results of our study provide evidence of another important role of public disclosure: namely, facilitating coordination among supply chain partners.