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The government monitors its suppliers’ internal information processes to reduce uncertainty about the suppliers’ ability to fulfill their commitments. In this paper, I argue that these monitoring procedures improve the suppliers’ internal information, which in turn leads to higher quality external reporting. Using a dataset of U.S. government contracts, I find a positive relation between government contract awards and the quality of firms’ external reporting environment. Consistent with government monitoring of internal information processes driving this relation, I find that firms improve their external reporting when they first start contracting with the government, and that the magnitude of the improvement varies predictably with contract characteristics that entail a greater degree of government scrutiny. Finally, I use the establishment of the Cost Accounting Standards Board (CASB) in 1970 as an exogenous shock to contractor monitoring, and find greater improvements in the external reporting environment among firms affected by the CASB’s monitoring requirements. Overall, these results suggest that monitoring by the government as a customer plays a role in shaping the firm’s transparency.  This paper is based on my dissertation. I am very grateful to the members of my dissertation committee for their support, guidance and insightful comments: Wayne Guay (co-chair), Luzi Hail, Chris Ittner (co-chair), and Dan Taylor. I also thank Brian Bushee, Paul Fischer, Stephen Glaeser, Mirko Heinle, Bob Holthausen, Chongho Kim, Rick Lambert, Cathy Schrand, Robert Verrecchia, Frank Zhou, and seminar participants at the 2016 Carnegie Mellon Accounting Mini Conference, Harvard University, Massachusetts Institute of Technology, Stanford University, the University of Chicago, the University of California Los Angeles, the University of Michigan, the University of North Carolina, the University of Southern California, the University of Texas at Austin, the Wharton School of the University of Pennsylvania, and Yale University for helpful comments. Finally, I thank the Wharton School, the Connie K. Duckworth Endowed Doctoral Fellowship, and the Deloitte Foundation for their generous financial support.

Government Procurement and Changes in Firm Transparency