Corporate Suppliers and Customers and Accounting Conservatism
Kai Wai Hui
Hong Kong University of Science & Technology (HKUST) - Department of Accounting
University of Arizona - Department of Finance
P. Eric Yeung
Cornell University - Samuel Curtis Johnson Graduate School of Management
November 1, 2011
We argue that a firm’s suppliers and customers prefer it to account more conservatively due to information asymmetry and these stakeholders’ asymmetric payoffs with respect to the firm’s performance. We predict that a firm meets this demand for accounting conservatism when suppliers or customers have bargaining advantages over it that enable them to dictate terms of trade or whether trade occurs at all. We show that when a firm’s suppliers or customers have greater bargaining power, the firm recognizes losses more quickly. Our findings provide insights into how a firm’s powerful suppliers and customers are associated with its accounting practices and also support the contracting explanation for accounting conservatism.
Number of Pages in PDF File: 46
Keywords: Financial disclosures, Conservatism, Suppliers, Customers
JEL Classification: M41, K12, D82
Date posted: July 1, 2009 ; Last revised: November 13, 2011
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