Corporate Suppliers and Customers and Accounting Conservatism

46 Pages Posted: 1 Jul 2009 Last revised: 13 Nov 2011

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Sandy Klasa

University of Arizona - Department of Finance

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: November 1, 2011

Abstract

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.

Keywords: Financial disclosures, Conservatism, Suppliers, Customers

JEL Classification: M41, K12, D82

Suggested Citation

Hui, Kai Wai and Klasa, Sandy and Yeung, P. Eric, Corporate Suppliers and Customers and Accounting Conservatism (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=1426839 or http://dx.doi.org/10.2139/ssrn.1426839

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Sandy Klasa

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

P. Eric Yeung (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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