Control Beyond Ownership: Open-Book Accounting in Unbalanced Supply Chain Networks

Open-book accounting is a practice to disclose the full cost structure of suppliers to customers to achieve cost efficiency in supply chains. However, the dominant market power of customers could interfere with this goal in practice. Using unique data on the suppliers of large Korean business groups, we find that open-book accounting is associated with profit rate regulation by customers. Suppliers’ price growth is capped despite the increase in supplied goods. Profit rates of suppliers significantly co-move in times of low average profitability. Using an exogenous regulatory reform that outlawed coercive open-book accounting, we find the tendencies significantly reversed post-reform.