Customers' Pessimistic Disclosure and Corporate Innovation: The Role of Government‐Background Principal Customers

ABSTRACT We investigate the relation between pessimistic disclosure of principal customers and corporate innovation and how such relation varies with the presence of government‐background customers. Empirical analyses show that when the tone of principal customers' annual reports is more pessimistic, focal companies will invest less in R&D. Cross‐sectionally, the relationship is stronger when focal companies offer more trade credit or are financially constrained or when customers are at higher default risk. However, it is mitigated when customers are geographically closer or more stable in the supply chains. Such a relationship is driven by focal companies with government‐background principal customers.