Customer-Supplier Relationships and Abnormal Accruals

43 Pages Posted: 26 Apr 2017 Last revised: 11 Aug 2019

See all articles by May Xiaoyan Bao

May Xiaoyan Bao

University of New Hampshire - Peter T. Paul College of Business and Economics

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Yixin Liu

University of New Hampshire

Date Written: November 1, 2018

Abstract

We examine the relationship between customer and supplier firms’ abnormal accruals. We propose “earnings management” hypothesis and “customer demand shock” hypothesis. We find that customer firms’ demand shocks link customer and supplier abnormal accruals as they propagate along the supply chain, via the “bullwhip” effect. Our evidence supports “customer demand shock” hypothesis. The evidence that a customer’s abnormal accruals transmit and magnify down the supply chain suggests that suppliers imperfectly predict new orders from their customers and that improving predictions would mitigate this bullwhip effect. Consistent with this view, we find that a customer’s abnormal accruals have a much smaller impact on those of its suppliers whose auditors have expertise in the customer’s industries. Overall, our results suggest that the supply chain is an important transmission channel of abnormal accruals, and auditor expertise serves to reduce information opaqueness during this process.

Keywords: Abnormal accruals; bullwhip effects; suppliers; customers.

JEL Classification: M40, M41,G32

Suggested Citation

Bao, May Xiaoyan and Billett, Matthew T. and Liu, Yixin, Customer-Supplier Relationships and Abnormal Accruals (November 1, 2018). Kelley School of Business Research Paper No. 17-36, Available at SSRN: https://ssrn.com/abstract=2958292 or http://dx.doi.org/10.2139/ssrn.2958292

May Xiaoyan Bao (Contact Author)

University of New Hampshire - Peter T. Paul College of Business and Economics ( email )

10 Garrison Avenue
Durham, NH 03824
United States

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Yixin Liu

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

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