Relationship-specificity and accounting conservatism: the effect of customer and supplier 1

Previous literature provides evidence that conservatism could be driven by debt/compensation contract, litigation, regulation, and taxation reasons. This paper extends the above boundary by including customers and suppliers to explain the role of conservatism. Specifically, we test whether higher customer/supplier specificity is associated with firm's more accounting conservatism. Since customer/supplier specificity can create ex-post opportunistic incentive to the firm we expect conservatism can service a commitment role to induce the customer/supplier to undertake assets specific investment under this situation. Using asymmetric timeliness and customer/supplier R&D intensity as our major proxy for conservatism and specificity, we find, on both industry and firm level, firm's accounting conservatism is positively associated with customers/suppliers specificity. And this relation is weaker when an alternative mechanism, vertical integration, exists between the contracting parties or customer/supplier market concentration is low.