Accounting-Based Governance in Supplier–Customer Relationships

Abstract

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.