Utilizing the introduction of the Trade Reporting and Compliance Engine (TRACE) as an exogenous shock to enhance secondary bond market transparency, we investigate the informational feedback effect of the bond market on supplier innovation in vertical relationships. We find that the increased availability of trading details regarding major customers’ outstanding bonds significantly fosters their supplier firms’ innovative investment. This positive effect of bond market transparency enhancements on supplier innovation is weakened when major customers demonstrate a better information environment, have higher levels of institutional ownership, and share common institutional investors with suppliers, while strengthened when the bond market conveys positive information about major customers, and when major customers face tighter financial constraints, exhibit higher levels of risk-taking, and possess greater importance to suppliers. Our findings clearly identify the informational role of the bond market in corporate investment decisions and specifically highlight the importance of bond market information regarding customer firms to the innovation along the supply chain.
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