Presenter: Jiaying Li, Bayes Business School

Title: Do Customers Play a Corporate Governance Role?

Abstract: This paper presents new evidence that corporate customers play a governance role in disciplining managerial behavior. Using a comprehensive dataset of customer-supplier relationships, we show that major downstream firms respond to upstream firms’ EPS manipulation - instrumented by variations in the incentive to manipulate - by severing business relationships. Ex ante, the threat of withdrawal by major customers appears to deter upstream firms from engaging in EPS manipulation. Suppliers with short-term incentives strategically reallocate trade credit among customers to retain their largest customers, which mitigates the ex-post impact of customer governance.

Host: Thomas Kokholm