Supplier Concentration and Earnings Management

Abstract

In this paper, I empirically examine the association between supplier concentration and earnings management. A firm’s major suppliers use its accounting performance to evaluate its ability to fulfill trading obligations and honor implicit claims, giving rise to its stronger incentives to manipulate earnings. However, the firm may face punishment and termination of relationships if major suppliers detect its earnings management with their information and bargaining advantages. Employing a comprehensive sample of firms with supply chain data, I find a negative association between a firm’s supplier concentration and earnings management using discretionary accruals and real activities. My results suggest that customer firms are concerned about major suppliers’ close monitoring and bargaining power, thereby decreasing their earnings management practices.