Buyer-Supplier Relationships and Corporate Finance: Earnings Management, Corporate Governance and Capital Structure

客戶供應商關係與公司金融:盈餘管理、公司治理和資本結構

Student thesis: Doctoral Thesis

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Author(s)

  • Weiqing LUO

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Detail(s)

Awarding Institution
Supervisors/Advisors
Award date29 Aug 2016

Abstract

Titman (1984) is the first to argue that non-financial stakeholders (customers, suppliers and employees) pass on their expected liquidation costs to the firm which in turn can affect the firm's financial decisions. In the same vein, this dissertation investigates the influence of buyer-supplier relationships on supplier firms' financial policies in terms of earnings management, corporate governance and capital structure. The whole dissertation is composed of three essays, each focusing on one particular issue related to corporate finance.
(1) The first essay investigates the monitoring role of firm's principal customers in improving earnings reporting quality. We predict that a supplier firm has high quality earnings disclosure when the firm's customers are concentrated. By employing the Sarbanes Oxley Act of 2002 as natural experiment of a shock to earnings manipulation activities, we show that firms with lower customer concentration experience a significant drop in accrual based earnings management after the passage of SOX compared with those with higher customer concentration. The results suggest that the concentrated customers can serve as the monitoring agent that improves the earnings quality. Principal customers have more incentive to monitor supplier firms in a noisy environment where information asymmetry is greater. Consistent with the notion, such relation is more pronounced when supplier firms have less analyst coverage. Moreover, evidence also suggests that these relations are more pronounced if supplier firm's internal governance is worse, financial health is poorer, and dependence on customers is stronger. The results are robust across alternative measures of buyer-supplier relationships and other specifications. These findings are consistent with the monitoring hypothesis, specifically that principal customers as non-financial stakeholders play an important governance role in scrutinizing management behavior.
(2) The second essay investigates whether a firm's customer–supplier relationships can discipline the managers hence improve corporate performance. To test the hypothesis that concentrated customers can discipline the managers and serves as a substitute for corporate governance, we use the passage of Sarbanes Oxley Act (SOX) in 2002 to examine how firms respond to an exogenous shock to their level of internal governance as a function of their customer concentration level. Because SOX significantly increased penalties for officers who are charged with fraud, heightened scrutiny over external and internal audits, and enhanced disclosure of insider trading, it provides an important natural experiment of a shock to internal governance, and therefore a natural laboratory to examine the interaction between customer concentration and internal governance. The results are consistent with the hypothesis that firms with diversified customers benefit more after the passage of SOX in terms of accounting performance. The further evidence of efficiency gains suggests that substitution effect is partially attributed to operating efficiency. Moreover, this relation is more pronounced when the suppliers have more relationship-specific investment and produce more durable and unique goods. The results are robust and can survive across the alternative specifications. The findings provide insights into how a firm's principle customers serve as a device for disciplining managers and a substitute for internal governance.
(3) The third essay investigates the role of customers' switching costs on suppliers' capital structure. Customers can rationally anticipate the costs they will face if they have to change the supplier thus would force the firms to make conservative financial decisions, i.e. choose a lower leverage ratio. While higher switching costs hinder customers from changing suppliers which gives those firms ex-post market power. Therefore, those firms would take aggressive financial strategies after they build a significant market share. We use the cost structure as the proxy for customer switching costs and market power to examine the predictions. The results confirm the hypothesis that firms with higher switching-cost products have lower financial leverage. Moreover the ex-post market power can reduce the effect such that firms take more aggressive financial strategies.