Opportunistic Disclosure in the Inter-Organizational Relationships

The purpose of this paper is to explore the effect the accounting system choice has, when the supplier discloses accounting information opportunistically in an Inter-Organizational Relationship. A contract governs the trade and specifies: (i) a cost reimbursement and (ii) a profit sharing arrangement. The supplier’s opportunism emerges as he can manages the rate that is used for allocating overhead costs to the reimbursed product. Two methods of allocation rate management are available, leading to two distinct inefficiencies. First, the supplier can use some input factors in excess (Real Cost Management). Second, the supplier can influence the trade quantity (Real Activity Management). We find that even with opportunistic disclosure, the total profit of the relationship exceeds the profit under the arm’s-length relationship. With a traditional accounting system, the supplier engages in Real Cost Management if the total overhead cost is high compared to the total direct labour cost. With an Activity-Based Accounting system, the supplier engages in Real Cost Management when the overhead cost of the traded product is small compared to the overhead cost of other products. We further show that the supplier engage in Real Activity Management regardless of the accounting system. However, the size and the direction of the quantity distortion depends on the accounting system.