Customer Geographic Clustering and Revenue Recognition: Evidence from China

Abstract

Although theoretical studies suggest that customers may have an impact on a supplier firm’s accounting practices, empirical evidence remains limited and inconclusive. We posit that geographic clustering increases the likelihood of communication between customers and that managers who perceive this likelihood will make more disciplined revenue reporting decisions. Using major customer data from China, we find that firms with more geographically clustered customers report less absolute discretionary revenue. This result is more pronounced when the supplier’s customers are more likely to communicate with each other, when their demand for information is stronger, when supplier-customer information asymmetry is more severe, and when the supplier has less bargaining power. The main results survive after addressing endogeneity concerns and a serial of other robustness tests. Our findings offer insight into how the relationship between customers relates to earnings quality and we extend the literature on corporate geographic characteristics.