The spillover effect of customers' financial risk on suppliers' conservative reporting: Evidence from China

Zeyu Sun, Ge Yang and Haichen Bai

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: This study examines how customer firms' financial risk affects supplier firms' conservative reporting. Customers' high financial risk increases suppliers' uncertainty in future performance. We find that suppliers, in response to investors' demand, become more conservative in financial reporting when their customers' financial risk is higher. In support of the contracting explanation, we show that this spillover effect is salient for supplier firms in need of bank loans and for those with better corporate governance. In addition, this effect disappears for suppliers in regions with weak protection of investor rights and when customers are state-owned enterprises. Furthermore, we find the effect intensified by the extent of suppliers' dependence on their customers. Our study provides insights into the externality of customers' risk on the suppliers' financial reporting policy in the emerging markets.

Keywords: Customer-supplier relationship; Accounting conservatism; Financial risk; Spillover effect; Institutional environment (search for similar items in EconPapers)
JEL-codes: D82 G32 M41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923000923

DOI: 10.1016/j.irfa.2023.102576

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