Customer Concentration and Earnings Management: Evidence from the Sarbanes–Oxley Act

Abstract

We use the Sarbanes–Oxley Act of 2002 (SOX) to examine the link between customer concentration and earnings management. We find that SOX has led low-customer-concentration firms to reduce accrualbased earnings management more than high-customer-concentration firms have, suggesting that corporate governance to ensure high-quality earnings is more important when firms have lower customer concentration. The effect of customer concentration is especially pronounced when firms are involved in higher relationship-specific investments. The results are robust to accounting for endogeneity, alternative measures of discretionary accruals and of customer concentration. We additionally show that operating performance increase more in low-customer-concentration firms after SOX.