The Effects of Customers’ Bargaining Power on Capital Expenditure and Earnings Management: Evidence from Taiwan

Abstract

This paper examines the effects of the suppliers-customers relationship on a company’s earnings management and the effects of accrual-based and real activities earnings management on the capital expenditure of a company. This paper further examines the influence of the bargaining power of major customers on earnings management and how this bargaining power intervenes in the relationship between capital expenditure and earnings management. When the bargaining power of major consumers is measured by the HHI index, the result shows that the higher the capital expenditure of a company, the greater the company’s accrual earnings management. If the bargaining power of major customers is measured by the thresholds of 5% and 10% of sales percentage, the higher the capital expenditure, the greater the real earnings management. The stronger the bargaining power of major customers, the larger the real activities and accrual-based earnings management of the company. Moreover, companies’ capital expenditure and earnings management present a causal relationship. The bargaining power plays an important role in the relationship between earnings management and capital expenditure.