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​.

Keywords: Customer concentration; corporate governance; SOX; earnings management
JEL Classifications: M41; D82; G38; L14