Customer Bargaining Power and Strategic Financial Reporting

52 Pages Posted: 4 Nov 2020 Last revised: 30 Nov 2023

See all articles by Paul Hribar

Paul Hribar

University of Iowa - Department of Accounting; University of Iowa - Henry B. Tippie College of Business

Sam Melessa

University of Iowa - Department of Accounting

David Volant

Indiana University - Kelley School of Business

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Date Written: November 28, 2023

Abstract

We investigate whether bargaining incentives between suppliers and customers affect financial reporting decisions. We posit that firms with major customers strategically classify certain costs as cost of goods sold (COGS) rather than as selling, general, and administrative expenses (SG&A) in order to deflate their gross margin and reduce the bargaining power of their major customers. Holding profitability constant, we find customer concentration (our proxy for major customers with bargaining power) is positively associated with a higher ratio of COGS to SG&A. To distinguish between strategic cost classification and differences in real economic cost structure associated with customer concentration, we use external monitoring as a moderating variable and show that greater monitoring by auditors and analysts attenuates the association. In cross-sectional tests, our results are strongest where theory suggests customer-supplier bargaining is most likely. Taken together, our results provide evidence that customer negotiations are an important consideration in suppliers’ financial reporting decisions.

Keywords: expense classification, customer concentration, bargaining power

Suggested Citation

Hribar, Paul and Melessa, Sam and Volant, David and Wilde, Jaron H., Customer Bargaining Power and Strategic Financial Reporting (November 28, 2023). Available at SSRN: https://ssrn.com/abstract=3696700 or http://dx.doi.org/10.2139/ssrn.3696700

Paul Hribar (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Sam Melessa

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

David Volant

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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