Customer-Supplier Relationships and Abnormal Accruals.

• In Event: Strategic Disclosures 2

Abstract

Accruals of suppliers naturally link to those of their customers via fundamental economic channels. We explore the influence of powerful customers on suppliers’ accruals and ultimately on measures of earnings management. We first document a strong link between a supplier’s abnormal accruals and those of its major customers, consistent with the posited economic channel. Next, we show that expunging these customers-driven effects from abnormal accruals diminishes the value relevance of abnormal accruals and enhances the value relevance of normal accruals. Our findings suggest abnormal accrual measures can be further honed by incorporating the effects of customer-supplier relationships.

Authors

• May Xiaoyan Bao, University of New Hampshire

• Matthew T. Billett, Kelley School of Business at Indiana University.

• Yixin Liu, University of New Hampshire