Building a Cooperative Customer Relationship: Empirical Evidence from Credit Provision to Major Customers
JIANG Wei, DI Lulu, LIU Chengda
School of Business, Renmin University of China; School of Accounting, Southwestern University of Finance and Economics; Management School, Zhejiang University of Technology
Summary:
It is critical for managers to make appropriate decisions in dealing with supply chain risks (McKinsey, 2010). The literature suggests that, if a supplier firm and its customers can build a cooperative rather than an arm's length relationship, the communication and cooperation between them will not only mitigate the hold-up problem and operating risk induced by major customers (Bensaou, 1999), but also enhance firm performance and value (Kalwani and Narayandas, 1995; Patatoukas, 2012; Irvine et al., 2016). However, few studies in the accounting and finance literature have explored how to build and maintain a cooperative relationship with customers, especially major customers (Anderson and Dekker, 2009). Several scholars have provided limited empirical evidence on cooperative relationship building from the perspectives of capital structure, accounting policies, and earnings management (Banerjee et al., 2007; Kale and Shahru, 2008; Raman and Shahrur, 2008; Dou et al., 2013). In the literature on trade credit, most studies have focused on the role of accounts receivable as financing (Love et al., 2007; Giannetti et al., 2011), neglecting its role as a product quality warranty when the supplier firm and its customers are attempting to build a cooperative relationship (Smith, 1987). Because it is challenging to obtain large-sample information on specific products and terms of trade credit, the empirical evidence on the role of accounts receivable as a product quality warranty is not only limited, but also indirect (Long et al., 1993; Klapper et al., 2012; Dass et al., 2015). Considering the potential hold-up problem and operating risk induced by major customers, there is a lack of direct empirical evidence on whether and how supplier firms use accounts receivable as a product quality warranty when building and maintaining a cooperative relationship with major customers. Empirical evidence on this topic would provide insight into integrating supply chains and improving supply chain finance, thus enhancing a country's global economic competitiveness. Our initial sample consists of all firms listed on China's Shenzhen and Shanghai Stock Exchanges from 2005 to 2015. Our sample period starts in 2005 because this is the first year in which a sizable portion of listed firms started disclosing information about their top five customers. In addition, before 2005, to enhance their transparency in response to investors' demands, publicly listed firms in China began to disclose the names of their top five debtors and the corresponding amounts and age of their accounts receivable. We therefore manually collect the location of each top five customer and each top five debtor and the amount and percentage of sales to them for all listed firms between 2005 and 2015. All financial data, the names of the top five debtors, and the corresponding amounts and age of accounts receivable are from China Stock Market and Accounting Research (CSMAR) and China Center for Economic Research(CCER). Our results show that, when customer concentration is high, credit terms are more lenient; that is, a larger amount of accounts receivable with a longer maturity is provided to major customers. Further evidence shows that, when the geographic proximity between a supplier firm and its major customers is distant, when the supplier firm is in a competitive industry, and when the supplier firm is located in a region with high level of business environment, the positive relation between customer concentration and lenient credit terms strengthens. Lastly, we find that the more credit that is provided to major customers, the better the supplier firm's performance. This paper makes two contributions to the literature. First, we contribute to the accounting and finance literature on how to build a cooperative relationship with major customers, because there is limited empirical evidence in the literature from the perspectives of capital structure, accounting policies, and earnings management. Second, using the unique data from disclosed information on Chinese listed firms' top five debtors and top five customers, we provide relatively direct empirical evidence on the role of accounts receivable as a product quality warranty when the supplier firm and its major customers are building and maintaining a cooperative relationship. Because it is challenging to obtain large-sample information on specific products and terms of trade credit, the empirical evidence on the role of accounts receivable as a product quality warranty is not only very limited, but also indirect.
江伟, 底璐璐, 刘诚达. 商业信用与合作型客户关系的构建——基于提供给大客户应收账款的经验证据[J]. 金融研究, 2021, 489(3): 151-169.
JIANG Wei, DI Lulu, LIU Chengda. Building a Cooperative Customer Relationship: Empirical Evidence from Credit Provision to Major Customers. Journal of Financial Research, 2021, 489(3): 151-169.
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