A firm’s corporate suppliers and customers use its accounting performance to gauge its underlying economic
performance. Suppliers and customers will consider the firm’s accounting performance when evaluating if it can meet
its short-term trading obligations. Likewise, long-term suppliers and customers study the firm’s accounting performance
to assess its long-term financial viability and the risk of making relationship-specific investments. For instance, a supplier
involved in a long-term transaction with a firm might acquire specialized assets to manufacture specific products for the
firm, while a customer involved in a long-term transaction may tailor its production technology to process products
purchased from the firm. If the firm were to go out of business, the supplier and customer could face large switching costs.
Suppliers and customers involved in long-term transactions with a firm will also consider its accounting performance
when evaluating the risk that the firm might experience financial distress and no longer honor their implicit claims