Supply Chain Shocks and Firm Productivity: The Role of Reporting Quality

We examine the role of reporting quality in firms’ responses to a supply chain shock. Extant research examines the role of financial or managerial reporting quality in recurring operating or investing decisions, but evidence is lacking on how reporting quality influences how well firms restructure in the face of a negative shock. Our shock is the 1999 Taiwan earthquake, which negatively affected a subset of US high-technology manufacturing firms by disrupting their supply chains. We find total factor productivity increases for affected firms relative to unaffected ones. Affected firms increase their productivity more if they have higher pre-shock reporting quality. Moreover, the relation of pre-shock reporting quality with the post-shock productivity improvement is more pronounced for firms that incur post-shock restructuring charges or make bigger spending cuts. Finally, we find that post-shock accounting measures of performance improve more for affected firms with higher pre-shock reporting quality. Overall, our results indicate that reporting quality can facilitate increases in productivity and performance when firms face a large shock to their competitive environment.