Customer Concentration and the Readability of 10-K Reports

We investigate the relationship between customer concentration and the readability of suppliers’ financial disclosures. Using a large sample of 9,554 US-listed firms from 1994 to 2020, we find that suppliers with a more concentrated customer base produce lower quality 10-K reports. This negative association is driven by managerial obfuscation motives and is more pronounced for suppliers that pay excess CEO compensation, face lower customer switching costs, make higher relationship-specific investments and have greater board independence. Suppliers with high customer concentration produce better quality reports when they face increased institutional monitoring. We mitigate potential endogeneity issues using an instrumental variable, propensity score, entropy balance matching, and Oster’s (2019) test for omitted variable bias. Our results are robust to several alternative proxies for both customer concentration and 10-K report readability. Our findings provide robust empirical evidence that suppliers with a highly concentrated customer base produce less readable financial information.