Customer Concentration and Earnings Management: Evidence from the Sarbanes-Oxley Act

European Accounting Review, forthcoming

65 Pages Posted: 19 May 2017 Last revised: 17 Jul 2023

See all articles by Ryoonhee Kim

Ryoonhee Kim

Korea Advanced Institute of Science and Technology (KAIST)

Weiqing Luo

City University of Hong Kong

Date Written: April 18, 2017

Abstract

This paper investigates whether the level of customer concentration can moderate the effect of the Sarbanes–Oxley Act of 2002 (SOX) on the earnings management of U.S. corporations. Customer concentration can act as a mechanism for reducing agency problems by pressuring supplier firms to be more efficient. Large customers may act as certifying agents for a supplier, and they may reduce information asymmetries about the supplier. These two channels suggest that customer concentration may affect corporate earnings management and hence generate heterogeneity in the effects of SOX. This paper documents that SOX has led firms with low customer concentration to reduce accrual-based earnings management more than those with high customer concentration have. The effect of customer concentration is especially pronounced when firms are involved in higher relationship-specific investments. The results are robust to accounting for endogeneity and alternative measures of discretionary accruals and customer concentration.

Keywords: Customer concentration, internal control, SOX, earnings management

JEL Classification: M41, D82, G30

Suggested Citation

Kim, Ryoonhee and Luo, Weiqing, Customer Concentration and Earnings Management: Evidence from the Sarbanes-Oxley Act (April 18, 2017). European Accounting Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=2970368 or http://dx.doi.org/10.2139/ssrn.2970368

Ryoonhee Kim (Contact Author)

Korea Advanced Institute of Science and Technology (KAIST) ( email )

Daejeon
Korea, Republic of (South Korea)

Weiqing Luo

City University of Hong Kong ( email )

Hong Kong

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