Do Suppliers Benefit from Customer Concentration: Evidence from Real Earnings Management

66 Pages Posted: 5 Sep 2019 Last revised: 24 Sep 2019

See all articles by Mingcherng Deng

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Yan Yan

Fairleigh Dickinson University

Date Written: July 29, 2019

Abstract

This study investigates whether and how customer concentration in supply chains affects suppliers’ incentive to engage in real earnings management. Building on the recent debate over the collaboration hypothesis and the rent extraction hypothesis, we show that with concentrated major customers, suppliers are more likely to engage in real earnings management, resulting in higher current and future profitability. Further analysis reveals that capital markets may unravel the positive effect of real earnings management on supplier profitability: stock return is significantly negative for suppliers who take more real earnings management as a result of customer concentration. Our results are robust to alternative measures of customer concentration and real earnings management and to the instrumental variable approach. Collectively, our empirical evidence supports the rent extraction hypothesis, suggesting that the positive association between customer concentration and supplier profitability may partially be driven by real earnings management.

Keywords: customer concentration, real earnings management, supply-chain competition

JEL Classification: M41, L23

Suggested Citation

Deng, Mingcherng and Yan, Yan, Do Suppliers Benefit from Customer Concentration: Evidence from Real Earnings Management (July 29, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-09-03. Available at SSRN: https://ssrn.com/abstract=3444688 or http://dx.doi.org/10.2139/ssrn.3444688

Mingcherng Deng

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Yan Yan (Contact Author)

Fairleigh Dickinson University ( email )

1000 River Rd
Teaneck, NJ 07666
United States

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