The paper studies the impact of financial accounting quality on the contractual rigidity of product market contracts. Economic theory suggests that transaction parties write rigid contracts in response to the risk of opportunism. Consistent with the importance of accounting information in contract governance, I find that supply contracts following accounting restatement have a higher degree of contractual rigidity, i.e. more rigid and less flexible contracting language and stricter price adjustment provision. The results are stronger when there is a greater need to deal with opportunism. The findings are robust to alternative measures of accounting quality and contractual rigidity. Overall, this study improves the understanding of the role of accounting in the writing of product...[ Read more ]

The paper studies the impact of financial accounting quality on the contractual rigidity of product market contracts. Economic theory suggests that transaction parties write rigid contracts in response to the risk of opportunism. Consistent with the importance of accounting information in contract governance, I find that supply contracts following accounting restatement have a higher degree of contractual rigidity, i.e. more rigid and less flexible contracting language and stricter price adjustment provision. The results are stronger when there is a greater need to deal with opportunism. The findings are robust to alternative measures of accounting quality and contractual rigidity. Overall, this study improves the understanding of the role of accounting in the writing of product market contracts.