“On the Association between Customer Power and Accounting Profitability: Collaboration or Rent Extraction?” by Dr. Eric Yeung
Dr. Eric Yeung
Associate Professor of Accounting
Samuel Curtis Johnson Graduate School of Management at Cornell University
Theory and anecdotal evidence suggest that customer power should negatively affect firm profitability because customer power allows rent extraction. However, recent studies find that major customer concentration is positively associated with supplier firms’ profitability, suggesting that customer power primarily facilitates supply-chain collaboration. We show that measures of major customer power are negatively associated with a supplier firm’s profitability, stock returns, and operating cash flows, but positively associated with a supplier firm’s accruals (i.e., less efficient working capital management). These results strongly support the rent extraction hypothesis of customer power on supplier firms. We further show that prior evidence supporting supply-chain collaborations are subject to alternative interpretations.