I study contractual provisions that regulate the exchange of private accounting information in supplier–customer relationships. Using a large language model (LLM), I find that these provisions appear in 70.3% of supply contracts filed with the SEC and are more frequently used to monitor suppliers than customers. Supplier-targeted monitoring is more likely under cost-plus pricing and when suppliers have higher financial reporting quality. Customer-targeted monitoring is more likely when customers are financially weaker and when the contract includes royalty-based compensation. After contract initiation, customers that monitor suppliers exhibit lower operating costs per sale, particularly under cost-plus pricing. Suppliers that monitor customers hold less cash after contract initiation. Quasi-experimental evidence shows that private accounting monitoring intensifies in response to increases in counterparties’ internal accounting quality and risk. Overall, the findings suggest that the direction of accounting information flows reflects distinct economic incentives on the two sides of the supply relationship.

Separating operating from financial effects helps capture firm fundamentals, as these two types of risk tend to offset each other in the cross-section. We revisit the Fama-French six-factor model (FF6; 2018) by recomputing factors using operating characteristics while separately accounting for financial leverage. Our six-factor model subsumes the original FF6 model and outperforms the q-factor model (HXZ; 2015) in explaining a large set of documented anomalies. The improvement in capturing operating risk primarily stems from using return on net operating assets and growth in net operating assets as measures of profitability and investment, respectively. The enterprise book-to-market ratio becomes redundant once we consider the other operating characteristics. Additionally, after we control for operating effects, leverage is positively associated with returns, as predicted by theory, suggesting a renewed role for a leverage factor in asset pricing.