Accounting-Based Governance in Supplier–Customer Relationships

Abstract

Accounting mitigates bilateral information asymmetry in supplier–customer relationships arising from cost opacity or payment risk. Using a large language model (LLM), I identify provisions governing the production, dissemination, and verification of accounting information in material supply agreements filed with the SEC. These provisions appear in 60.5% of the agreements, with customers monitoring suppliers more often than in the opposite direction. Supplier-targeted monitoring is more likely under cost-plus pricing, whereas customer-targeted monitoring is more likely when customers are financially weaker. Monitoring in both directions is more likely when monitored parties have stronger financial reporting quality. After contract initiation, monitored suppliers exhibit higher subsequent sales, while customers holding information and verification rights over suppliers exhibit both higher sales and lower operating-cost ratios. The effects are stronger when the monitored party has lower pre-signing financial reporting quality. Customer improvements are greater under cost-plus pricing, whereas supplier improvements are greater under fixed-price contracts. Overall, the findings suggest that the direction of accounting information flows reflects distinct economic incentives and predicts subsequent firm performance.