Customer Bargaining Power and Strategic Financial Reporting

52 Pages Posted: 4 Nov 2020 Last revised: 5 Apr 2022

See all articles by Paul Hribar

Paul Hribar

University of Iowa - Department of Accounting; University of Iowa - Henry B. Tippie College of Business

Sam Melessa

University of Iowa - Department of Accounting

David Volant

University of Iowa - Henry B. Tippie College of Business

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Date Written: October 2021

Abstract

Abstract: We investigate whether economic bargaining incentives between suppliers and
customers affect financial reporting decisions. We posit that firms with major customers will
strategically classify certain costs as cost of goods sold (COGS) rather than as selling, general, and
administrative expenses (SG&A) in order to deflate their gross margin and reduce the bargaining
power of their major customers. Holding profitability constant, we find customer concentration
(our proxy for major customers with bargaining power) is positively associated with a higher ratio
of COGS to SG&A. To distinguish between strategic cost classification and differences in real
economic cost structure associated with customer concentration, we use external monitoring as a
moderating variable and show that greater monitoring by auditors and analysts attenuates the
association. Taken together, our results suggest that customer negotiations are an important
consideration in suppliers’ financial reporting decisions.

Keywords: expense classification, customer concentration, bargaining power

Suggested Citation

Hribar, Paul and Melessa, Sam and Volant, David and Wilde, Jaron H., Customer Bargaining Power and Strategic Financial Reporting (October 2021). Available at SSRN: https://ssrn.com/abstract=3696700 or http://dx.doi.org/10.2139/ssrn.3696700

Paul Hribar (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Sam Melessa

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

David Volant

University of Iowa - Henry B. Tippie College of Business ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business ( email )

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