Strategic Non-disclosure of Major Customer Identity

• In Event: Customers and Disclosure

Abstract

This study investigates firms’ decision to withhold the identity of their major customers. I first document that the extent of competition from private firms relates positively to non-disclosure of major customer identity. These results are consistent with firms’ claim of competitive harm from disclosing information that private firms are not required to disclose. Additional results show that the relation between private firm competition and non-disclosure of major customer identity increases when operations involving major customer relationships are highly efficient. These results reinforce non-disclosure being motivated by competitive cost concerns. However, I also find that the positive relation is more pronounced when operations involving major customers are highly inefficient. These findings suggest that non-disclosure is also motivated by agency cost concerns. While disclosure of customer identity is mandated by the SEC, firms with inefficient major customers appear better able to conceal these identities (i.e., to avoid disclosure requirements) by using the excuse of competitive harm from private firm competition. Consistent with agency cost-motivated non-disclosure, results are more pronounced when major customers are better able to extract rent and when customer relationship inefficiencies are more attributable to low managerial ability. As a final test, I show that non-disclosure of customer identity delays investors’ ability to assess the impact of customer distress on the supplier’s firm value. Results from this study demonstrate the important role that private firm competition and customer relationship efficiency jointly play in corporate disclosure decisions.

Author

• Herita Akamah, University of Oklahoma