The Impact Of Market Value On Supply Chain Performance Under Asymmetric Quality Cost Information

With the progressive realization of split share structure reform, China’s stock market has undergone a fundamental change. The goals of listed firms have changed from appreciation in asset value and profit maximization to market value maximization. Stock market is the important "reference frame" to the market size and performance of listed companies. It is also the reflection of the corporate governance structure, management ability and market competition ability, which are related to the development of the company. Thus, listed companies pay more and more attention to their market value. In this paper, we use theoretical analysis and empirical research to explore the impact of the market value concern on the supply chain decisions and performance based on the real earning management, supply chain coordination and contracts theory. Then we explain the decision incentive of the supply chain management and design reasonable contracts to improve the supply chain performance.We study the stock market reaction after listed companies published the purchases and sales contract announcement based on data collected from the two major stock exchanges in China. We found that contract announcements are associated with a statistically significant and positive impact on the stock market; announcements of sales contracts, especially, elicit more positive stock reactions than purchasing contract announcements. Because the prospective profit of the supplier can be identified by sales contracts, investors have more confidence in a supplier’s profitability, while the buyer’s profitability is uncertain due to fluctuating demand and inventory cost. Thus, investors prefer the firm who announces sales contracts over those announcing purchasing contracts. We investigated several effects—industry effect, risk prompt effect, and trade partner’s effect. The results showed that when machinery manufacturing firms announce contracts, the stock market reaction is more significant than in other industries. Furthermore, when listed firms announce contracts with foreign-funded firms, other listed firms, and non-listed firms in China, their stock market reaction is more significant than it is for announcements of signed contracts with the government. However, we did not find any evidence about the influence of risk prompt on the stock market. Finally, we found that firm size and debt-to-equity influence the market’s reaction to contract announcements. Contract announcements by larger firms are associated with more positive market reactions than those associated with smaller firms. The results also indicate that firms with low debt-to-equity ratio have more positive market reactions. Conversely, the investors and equity analysts do not fully utilize the information about growth prospects and predicted proportion of contract value. Thus, the listed firms have incentive to adjust their operation decision to gain more stock market return. And the investors should pay more attention to manufacturing firms when they announce sales contracts.Then we investigate the impact of market value concern on the supply chain decisions and performance when the quality cost information is asymmetric through the theoretical research. We study three situations:(1)the quality level is contractible and the price is fixed,(2)the quality level is non-contractible,(3)the quality level is contractible and the price is flexible. We find the price is increasing in the market value concern when the price is flexible. And in the symmetric quality cost information condition, we find in all of three situations, the product quality level, ordering quantity, buyer’s revenue and the supply chain revenue is higher when the supplier’s quality cost is low. In asymmetric quality cost information condition, we also find in all of three situations, the quality level and ordering quantity have distortion when the supplier’s quality cost is high, and the quality level and ordering quantity are increasing in the stock market value concern. Therefore, stock market value concern can mitigate this distortion. In addition, the buyer’s and supply chain’s revenue is increasing in the supplier’s market value concern. Especially, when the supplier only focus on the market value, the buyer’s and supply chain’s revenue achieve the first best level of symmetric information condition. The supplier’s revenue is only increasing in the market value concern when the proportion of high quality cost supplier and the market value concern is small. Finally, we compare three conditions and find that the buyer and supply chain can obtain more revenue when the quality level is contractible and the price is flexible. By comparing the three conditions, we find:(1) when the buy-back price is low and the supplier pays more attention to their market value, the supplier and the buyer can achieve win-win situation if the quality level is contractible;(2) when the value of products is low, different pricing strategies have little impact of on the supply chain.