Customer Concentration and Income Smoothing Activities

49 Pages Posted: 6 Jan 2021

See all articles by Boochun Jung

Boochun Jung

University of Hawaii at Manoa - School of Accountancy

Tae Wook Kim

The University of Hong Kong

Sang Hyun Park

Augusta University

Sung Wook Yoon

California State University, Northridge

Date Written: November 10, 2020

Abstract

We examine how customer concentration affects managers’ income smoothing incentives to signal their private information about risk and future earnings. We find a negative relation between customer concentration and income smoothing activities, indicating that improved information sharing from suppliers to customers through private channels reduces managers’ incentives to smooth earnings to provide private information about viability. To mitigate endogeneity issues, we perform three robustness tests: (1) a change in variables analysis, (2) a propensity score matching approach, and (3) a two-stage least squares regression analysis. We also show that the negative relation is more pronounced for supplier firms with larger relationship-specific investments for their major customers. Lastly, further analysis shows that managers’ income smoothing activities decrease as the length of the relationship between a supplier and its major customers increases, corroborating our main findings.

Keywords: Customer concentration, Supplier-customer relationship, Income smoothing, Information sharing, Private communication

JEL Classification: M41

Suggested Citation

Jung, Boochun and Kim, Tae Wook and Park, Sang Hyun and Yoon, Sung Wook, Customer Concentration and Income Smoothing Activities (November 10, 2020). Available at SSRN: https://ssrn.com/abstract=3728340 or http://dx.doi.org/10.2139/ssrn.3728340

Boochun Jung (Contact Author)

University of Hawaii at Manoa - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Tae Wook Kim

The University of Hong Kong ( email )

Hong Kong

Sang Hyun Park

Augusta University ( email )

1120 15th Street
Augusta, GA 30912
United States

Sung Wook Yoon

California State University, Northridge ( email )

David Nazarian College of Business & Economics
18111 Nordhoff Street
Northridge, CA 91330
United States
818-677-2428 (Phone)

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