Relationship-Specific Investments and Earnings Management: Evidence on Corporate Suppliers and Customers

65 Pages Posted: 6 Feb 2008

See all articles by Kartik Raman

Kartik Raman

Bentley University

Husayn K. Shahrur

Bentley University - Department of Finance

Abstract

We examine the determinants and consequences of earnings management by firms in the context of their relationships with suppliers and customers. We find that industry-level proxies for relationship-specific investments by suppliers/customers are positively associated with the magnitude of discretionary accruals, volatility of earnings, and the frequency of large earnings increases. We also find that firm-level proxies for the intensity of relationship-specific investments by actual suppliers are positively related to the magnitude of discretionary accruals. In addition, earnings management by the firm in one period is positively related to the magnitude of R&D investments by suppliers and customers in the next period. However, we find that earnings management adversely affects the duration of customer-supplier relationships. Overall, our findings suggest that earnings management is used opportunistically to influence the perception of suppliers/customers about the firms prospects.

Keywords: earnings management, accruals, relationship-specific investments, suppliers, customers

JEL Classification: M41, M43, L23

Suggested Citation

Raman, Kartik and Shahrur, Husayn K., Relationship-Specific Investments and Earnings Management: Evidence on Corporate Suppliers and Customers. Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1089921

Kartik Raman (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

Husayn K. Shahrur

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

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