Customer Concentration and Public Disclosure: Evidence from Management Earnings and Sales Forecasts

Abstract

This study examines the association between customer base concentration and corporate public disclosure policy. When the customer base is more concentrated, large customers face lower costs of accessing the supplier firm's private information, reducing customers' overall demand for the supplier's public information, suggesting a negative association between customer concentration and the amount of public disclosure. Alternatively, large customers have greater bargaining power and may demand that the supplier firm provide more public disclosures. Consistent with customer concentration facilitating private information flow from the supplier to customers, we find that the frequencies of management earnings and sales forecasts are negatively associated with customer concentration among firms with major corporate customers. These associations are stronger when the supplier and customers are engaged in more relationship‐specific investments, when customers' private information acquisition costs are lower, and when it is less costly for customers to find another supplier.

How Does Financial‐Reporting Regulation Affect Industry‐Wide Resource Allocation?

“…Similarly, customers could use the reports to identify the most efficient or stable firm in a given industry and could reallocate their business to this firm (Crawford et al. [2019]). By helping relationship outsiders, reporting mandates can be expected to shift the way resources are allocated from the relational toward the transactional type (e.g., characterized by dispersed ownership and dynamic product markets; Rajan and Zingales [2003]).…”

Financial Reporting in Non-listed Family Firms: Insights from Interviews with CFOs

“…Recently, researchers have paid some attention to the importance of financial statement information for firms' contracting with customers and suppliers (e.g., Crawford et al 2019;Hui et al 2012). The CFOs of my sample firms generally attached only low importance to customers (mean value: 2.43) and suppliers (mean value: 2.15) as addressees, but these low averages mask high importance in individual cases.…”

Major government customer and management earnings forecasts

“…On the demand side, corporate customers may have a greater demand for high-quality voluntary disclosure from suppliers than government customers. Crawford et al (2020) point out that government customers have lower demand for suppliers' public disclosure because they have greater bargaining and enforcement power to obtain information from their suppliers through private communications. However, their empirical analysis focuses only on corporate customers and does not inform us how the impact of government customers may differ from that of corporate customers.…”

“…The author finds that government suppliers release more timely financial reports and issue management forecasts more frequently, which is consistent with the prediction in Verrecchia (1990) that high-quality internal information improves the quality of public disclosure. Crawford et al (2020) argue that a close business relationship facilitates private information flow between customers and suppliers, and thus reduces customers' demand for public information. Empirically, they find that the frequency of supplier management earnings forecasts (MEFs) is negatively related to the degree of customer concentration.…”