Bridging the gap: A study of government suppliers' reporting practices

Abstract

Using 4 million procurement contracts valued at around $1 trillion, we examine the financial reporting quality of government suppliers. We document that government suppliers demonstrate higher-quality financial reporting than do firms without government contracts. This finding is partly attributable to improvements in firms' internal controls over financial reporting following contracting with the government. Additionally, we document that procurement contract clauses related to competitive procedures, government monitoring, and certification of internal information accuracy contribute to the quality of financial reporting. We address potential endogeneity concerns by studying changes in congressional committee leadership and performing difference-in-differences analyses around first- and last-time contract awards. Our findings highlight the role of government customers in enhancing the quality of mandatory disclosures and internal controls.